Hudson Global Inc (HSON) 2010 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hudson Highland Group First Quarter Earnings Results Conference Call.

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

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

(Operator Instructions).

I would now like to turn the call over to Mr.

David Kirby, Director of Investor Relations.

You may begin your conference.

Thank you, Wade, and good morning, everyone.

Welcome to the Hudson Highland Group conference call for the first quarter of 2010.

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 competition; seasonality; and the other risks discussed in our filings made with the Securities and Exchange Commission.

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 EBITDA.

An EBITDA reconciliation is included in our earnings release and our quarterly slides posted on our website, Hudson.com.

I encourage you to access our earnings call slides at this time.

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

With that, 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 normal practice, I will start off by talking about several themes with respect to our quarterly results and then I will turn it over to Mary Jane Raymond, our Chief Financial Officer, to discuss the financial results in more detail.

During the quarter it became evident that we were seeing improving economic cycles and hiring patterns in all of our markets, although at varying speeds.

As we often say, every recession is different, and as a result every recovery is different.

Never was it more true than in the first quarter.

Perm is clearly leading the recovery not lagging.

This is the reverse of previous cycles.

This is too widespread both in Hudson and in others in our industry to be merely a blip on the radar screen.

It really represents a fundamental difference in this recovery cycle.

Our strongest recovery is in Asia and the UK.

Really these are two very different stories.

Asia should not be a surprise to anyone, given the all too familiar headlines of economic growth in that region.

The Asian region was the region that was least impacted by the recession, in fact was barely touched by the recession, and is having an explosive economic recovery.

Our recovery has broadened from China and moved throughout our operations in Hong Kong and Singapore and across multiple functions and sectors.

This is the market of greatest growth potential over the next 10 years.

In the UK, quarter one results reflect revenue gross margin and profit growth greater than would be implied solely by economic growth, which is forecasted only up 1.3% for the year.

We are outperforming our key competitors measured by gross margin growth sequentially and year-on-year.

This growth has broadened from London, where it has been evident for a number of months, to Scotland and our regional Southeast English offices as well, and across multiple functional specializations.

Large companies are driving our results across our geographies.

In the short term, this is impacting our contract margins, not dissimilar from others in our industry, but this phenomenon is already showing signs of a trough.

I expect it will trough this year, although not next quarter.

Our operating leverage was strong in the first quarter and I expect it to remain so, as we have excess capacity in many of our markets.

Improvements in productivity are driving improved profitability.

Public sector spending was an important factor in 2009 that is now under pressure in 2010 and likely to be more so in 2011.

We are already seeing signs of a slowdown in many markets.

The public sector casts a wide net.

Certainly spending as a whole will decline as governments attempt to reduce the deficits incurred in fighting the recession, but spending will be maintained in many sectors and we are focusing our activities on those areas.

Nevertheless, we are being careful about our hiring in this sector.

We have issued guidance for the second quarter, as you can see from our shareholder letter, and Mary Jane will discuss our guidance in more detail in a few minutes.

Most significantly, our loss in Q1 was small, and it is our weakest quarter.

We expect to be profitable on an EBITDA basis for each of the next three quarters and for the year as a whole.

With that, I am going to turn over to Mary Jane to discuss our financial results in more detail.

May Jane?

Thanks Jon, good morning.

Our earnings slides for the call are posted on the website, as David said, hudson.com.

They start with the sequential comparison to the fourth quarter and move on to the comparison of prior year.

As Jon discussed, we are seeing improving conditions of varying speeds.

He made a few points worth repeating because they could have a sustained impact on our earnings for the year.

First of all, the top line is responding in all regions.

Second, perm is leading the recovery in nearly all of our larger markets that have a strong perm business.

Costs continue to be contained.

Fourth, pressure on the gross margin early in this recovery will likely ease as the recovery takes hold and also as the talent short professions where we specialize see continued increasing demand.

Finally, our cash use of $12 million will probably be about $15 million for the full year.

Half of that is to fund the reminder of the restructuring charge, which funded cost reductions well in excess of three times the charge amount.

The remaining cash use is expected to fund about $50 million of revenue growth or about 10% growth directionally when compared to last year.

Regarding the top line, countries contributing one half of our revenue in the quarter or over $90 million increased in Q1 over Q4.

These results coupled with the results of countries experiencing the more typical Q1 seasonal softness delivered a Q1 relative flat to Q4.

Compared to Q1 2009, revenue grew 9% overall and was down 3.5% in constant currency.

Perm growth led the increase, as Jon said, at 22% reported over 2009 and 8% in constant currency.

Temp grew 8%, down 5% in constant currency as the growth in the UK and US legal was offset in constant currency by continental Europe and ANZ.

Talent management was also down compared to prior year and the quarter due in part to the lesser demand for outplacement that we've talked about for the last few quarters.

This combination of factors may serve to moderate the shortness of the typical Q2 increase over Q1, but we don't expect they will entirely.

From a cost perspective, in virtually all of our countries, we either achieved over 100% leverage on the gross margin increase or we offset the gross margin decline by more than 100% when compared to last year.

The cash use of $12 million net in the quarter was a gross use of about $16 million offset by $3.5 million of an early payment of a sellers note on a past divestiture.

This includes about $9 million of funding growing contractor payroll, $3.5 million for restructuring costs and $1 million in capital.

The remainder is other cash outlays.

The contractor revenue grew $14 million between February and March.

It is fairly typical in our business for March to be larger than February, though this is perhaps a little bit steeper than we've seen in the recent past.

This skewing of the revenue to the third month of the quarter affects the funding pattern.

As a result, DSO was 53 days for the first quarter compared to 46 in Q4 and flat to prior year.

Additional availability under our credit facility increased to $15 million by the end of the first quarter, $10 million from our primary facility and another $5 million from our local facilities.

The cash balance of $24 million at March 31st is $41 million today, as a result of the equity offering we completed on April 6th.

The composite income tax expense for the first quarter was $300,000.

This is composed of $200,000 in withholding tax, and about a $100,000 in FIN 48 and other quarterly true-ups.

For the full year, we expect the tax provision to be about $1.5 million to $2 million, the majority of which is withholding tax and interest on the existing FIN 48 liabilities.

This doesn't include possible changes in the FIN 48 reserve, which are pretty hard to anticipate right now.

We had in the first quarter revised the level of our corporate management cost allocation to better reflect the time spent by the corporate resources on regional matters as a result of the management reductions in 2008 and 2009.

This has the knock-on effect of reducing the reported EBITDA results of our markets outside the United States.

The accompanying tables to both the press release and the shareholder letter lay out for you pretty clearly the profit contribution from our operations, as well as the non-op details including the corporate management charge.

The non-op income in this quarter included a $900,000 gain for a book gain on the note I mentioned earlier.

As a general matter, the other non-operating items apart from the corporate management charge are usually under $1 million in the aggregate and are often positive as we saw in the first quarter.

Turning to guidance for the second quarter, our revenue guidance for the second quarter is $190 million to $200 million with EBITDA at $1 million to $4 million at prevailing exchange rates.

This compares to revenue of $174 million and EBITDA loss of $9.5 million in last year's second quarter.

The second quarter of 2009 EBITDA loss included $5 million of charges in the $9.5 million loss.

This included $3.5 million for reorganization and $1.5 million in impairment charges.

In terms of how this might play out regionally, especially the revenue growth, just as a general direction, we would expect the revenue growth when compared to prior years to go along the lines of the following.

10% to 15% in Europe, with the bulk of that growth coming from the UK, 12% to 15% in ANZ, probably over 25% in Asia, and slightly negative to flat in North America.

In North America, legal continues to be fairly robust, but we don't expect much activity in the small to medium sized companies where our finance and IT practices tend to be focused.

These directional comments by region could vary as the quarter unfolds and we won't update them if they do.

In the second quarter, we expect to payout the bulk of our remaining restructuring charge or about $3 million to $4 million and we expect the contractor payroll to expand further.

However, with the seasonal improvement in revenue and EBITDA, this will lead to an improved net income and probably reduce cash usage when compared to the first quarter.

With that, I will turn it back to Jon.

Thank you very much, Mary Jane.

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

(Operator Instructions).

And your first question comes from the line of Paul Condra.

Hey great, thank you.

I just wondered what prompted the decision to breakout the ANZ versus Asia this quarter.

It's pretty simple.

There are rules as you probably know on how the segment reporting goes and one of them is when you look at the various aspects of the financial results, if they reach certain thresholds as a percentage of the consolidated amount, we break them out.

With the varying changes in the contribution of both revenue and income, Asia comes out for this quarter.

Okay, great.

I apologize, because I don't have the slides, but maybe these are in there.

Would you be breaking out or providing like historical breakouts just for modeling purposes for that segment?

Paul, we will do that as soon as we can.

The current slides will show a breakout for all of 2009 by quarter and the first quarter of 2010.

Okay, great, thank you.

And then, I guess since we are talking about Asia, I wanted to ask looking forward do you plan to grow, I noticed that most of that business is perm and I was wondering if maybe there is any other verticals that you see getting into going forward.

I think the 10-Q mentioned something about weakening hiring restrictions on some of your clients, and I wonder if that's opening any other opportunity that you could discuss?

Let me take it, let me try to tackle that Paul.

First of all, our Asia business, as I mentioned in my remarks, has grown strongly in the quarter, and it's not really a surprise when you look at the economic growth in the region.

In China, one of the things in China particularly, but across the region to a lesser extent last year in 2009, we saw dramatic hiring freezes instituted by multinational companies, and our business in China is particularly focused on multinational companies, instituted by multinational headquarters, particularly US companies.

Those hiring freezes have started to ease and we are seeing hiring begin to pickup in those same companies, and that's what was referenced in the 10-Q.

We are pretty broadly spread in terms of vertical markets in Asia, whether in China, Hong Kong or Singapore.

I think we are pretty much covering the market.

I don't see a need to expand our coverage.

We do have an opportunity to expand our geographic coverage particularly in China, and as we look at the region, that's probably the area that we think about the most.

We are in Shanghai, where we have a very good size of business, Beijing, where we also have a smaller but very good size business.

We have opportunities in Beijing, where we are primarily technology focused.

We have opportunities in the other segments.

And then we have opportunities in all of the so-called "smaller cities of China," but recognizing that many of these cities are the size of London.

So, there is I would say as we think about Asia, we think more about China, rather than going into smaller countries and we think more about going into the next tier of cities.

Great, thank you, that's very helpful.

And then, I just had one quick one on the Americas segment.

I don't know if you could provide, about how much in the IT and financial business, what's the breakout there versus IT versus financial?

That is in our slides.

Well, you have access to the web?

If you take a look, I know it's -- I don't look it up for you, but we do have it broken out in our slides.

Okay, thank you.

I have seen the slides, that's fine.

Sorry I missed it.

That's all my questions.

Thanks a lot.

Thanks, Paul.

Your next question comes from the line of Mark Marcon.

Good morning.

Nice progress across most of the globe.

Thanks.

Wondering if you can talk a little bit about what you are seeing in Europe.

Just -- obviously there is lots of cross currents over there, and I am speaking not about London specifically, but more about your Continental operations.

Any impact at all from all the noise around Greece and Portugal and Spain?

Well, first of all, if you look at Continental Europe, I would say our businesses are -- serve a different story in every country because of the focus of our business.

I understand that.

I would first and answer your second question first.

No, we don't see any impact in our business.

Curiously in Spain, which was -- okay, Greece was probably ground zero and Portugal was right behind in terms of big issues in Europe, but Spain is not far away.

Right.

Spain, we had a profitable month and we were up -- in year-on-year, we were up in top line growth.

So, our team in Spain did a great job in the quarter.

So, we are not seeing big impact in Spain.

If you look at our other markets, the Netherlands we are primarily focused on the public sector.

It was a superbly profitable business in 2009, hardly touched by the recession, as you might expect when you hear the words public sector.

As I mentioned in my opening remarks, we are seeing pressure in the public sector across the board as governments begin to look at ways to save money and cut deficits and do things.

That's impacting our business in the Netherlands.

That's primarily a contract business, so it impacts our contract growth rates and our contract margin particularly in Continental Europe, but even when you look at our global contract margin, that's having a negative influence.

Nevertheless, we made a profit.

They are still at a -- if you look at EBITDA as a percent of revenue, even in the quarter we were just under 6% in the Netherlands.

So, not as good as it was, but still pretty good and -- but we are seeing some impact from public sector pressure.

France is the market where we are probably most affected by the sluggish economy.

Basically we broke even in France in the quarter which we viewed that was an improvement over prior year, we viewed it as a very satisfactory result.

But that's a market where I would say we are seeing the impact of the sluggish economic growth in Europe.

And then Belgium, similarly is a combination of two, sluggish economic growth and public sector focus.

Again, public sector was a boon in '09 and becoming more -- experienced more pressure in '10.

But nevertheless, again, Belgium produced good profit in the first quarter and again right around the 6% EBITDA as a percent of revenue.

So, what I said last quarter about Europe was we certainly read the headlines and we see it in our business of the slowdown or slow recovery, but we still expect -- we did make a profit in the quarter in Europe.

We expect Europe will be profitable for the year and improved in profitability over the prior year, but more sluggish than it would be if we had stronger growth.

I think where we are today is we have our costs down.

We have a management team that's very experienced and very motivated.

And I think we are in as good shape as we can be given the slow recovery.

Great.

Just a follow-on in terms of your public sector.

How much -- I am assuming that Europe is a place where you have the most exposure to public sector and when we think about Europe how much of your business is public sector?

I do not have that number...

Roughly.

I have to -- David maybe while we are talking on the call we can come up with a number.

I don't think it's so much of a question, Mark, of it being a gigantic number.

I think it's a meaningful number, a meaningful percentage.

And I think just like we found when we look at our financial results this year with respect to outplacement, outplacement is not a particularly big part of our business, but a fall-off in outplacement again still has had a material -- maybe not material, but a meaningful impact on our business that we are kind of having to overcome.

So, we will do a little analysis while we are on the call and come back to hopefully by the end of the call with at least a round number idea.

Okay.

And then just you did nice job in terms of giving us some sense in terms of the revenue growth.

Can you just briefly discuss how you might think about profits, because you did a really nice job in terms of improving the year-over-year profit picture across the geographies here particularly in -- it's nice to see it in Asia where you did have the outplacement headwind.

So can you talk a little bit about how you would expect the second quarter to shape up from that perspective?

Well, I mean, first of all, the second quarter is normally a stronger quarter...

Of course.

Of course.

So that's a help.

I think when you look at our results what you are seeing is that in those markets where we are experiencing revenue growth, then you are seeing I think an outsized impact on our bottom line in terms of EBITDA.

And we would expect that trend to continue in the second quarter.

So we would expect certainly in places like Asia and the UK to continue to produce at that kind of level.

Mary Jane mentioned that she was expecting 12% to 15% growth in ANZ in the second quarter and that level of growth would fuel better profitability than you saw on the first quarter.

So, and then the same in -- as we look at Continental Europe, we would expect to see better revenue growth and we would expect the translation of that revenue growth into profits to be at a very substantial rate.

That's what's driving -- it's a combination of revenue growth flowing down to the bottom line because of our expense reductions, revenue growth flowing down to the bottom line in very significant percentages.

So we call that operating leverage, and our goal like that we have told you in the past is 50%, that we would expect to see 50% of increased GM dollars flowing down the EBITDA.

It's fantastic.

Nice to see all those hard efforts paying off.

Thank you.

And there are no further questions at this time.

I am just looking to see if we can find a number in answer to Mark's question.

I think we do not have an absolute number.

What we will do is publish in our website in our Investor Presentation, which we'll be updating next week, as we begin to talk more to investors and will publish that information with respect to at least a kind of what we call high-level picture of what public sector is of our gross margin.

With that, I will turn it over to David for closing remarks.

Thank you, Jon and thank you all for joining us this morning on the Hudson Highland Group First Quarter Conference call.

Our call today has been recorded and will be available later today on the Investor Section of our website hudson.com.

Thank you and have a great day.

This concludes today's conference.

Thank you for participating.

You may now disconnect.