Hudson Global Inc (HSON) 2010 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hudson Highland Group's Second 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.

If you would like to ask a question during this time, simply press *, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press the # key.

I would now like to turn today's call over to Mr.

David Kirby, Director of Investor Relations.

Please go ahead, sir.

Thank you, Celeste, and good morning, everyone.

Welcome to the Hudson Highland Group conference call for the second 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 the 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 through new or confirmed analyst expectations or estimates, or to update any forward-looking statements, whether as the results 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 quarterly slides, both 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 "Feature Documents," and our speakers will reference them during our remarks.

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

Thank you very much, David.

And thank all of you for joining us today.

I'm going to start off by talking about some of the themes that were prevalent during the quarter, both generally in our industry, and specifically in our Company.

Then I'm going to turn it over to Mary Jane Raymond, our executive vice-president and chief financial officer, to discuss our results in more detail.

In Q2, it became clear that we are living through an unusual recovery cycle.

But nevertheless, a recovery cycle that is gathering momentum.

Despite the several clouds created by macroeconomic factors, such as the Chinese slowdown, European debt crisis or US economic data, our operations did not experience any impact from those factors during the second quarter.

However, as we all know, visibility is limited in this industry.

We are seeing one of the most fundamental paradigm shifts in the industry's history.

Despite stubbornly high unemployment in all of the developed economies, permanent recruitment is recovering faster than professional contracting in virtually all markets, and clearly far earlier in the cycle than ever before.

While we don't know of any specific reason for this phenomenon, apparently the labor market has become a 2-tiered market, with strong demand for the top tier of highly skilled individuals.

Light industrial contracting, an early-cycle indicator, accelerated strongly in Q2 in many companies.

Professional contracting is often thought to lag the recovery cycle, and that is proving to be the case in this cycle, except for IT.

In particular, accounting is continuing to lag in all geographies, with many companies still reporting revenue declines compared to prior-year.

Europe is still showing only the early signs of recovery, except in the Netherlands, which is still lagging after a relatively healthy 2009.

Public-sector recruitment is declining and is clearly threatened by the austerity plans across the globe, while financial services demand is booming in most markets.

But fundamentally, ignoring the clouds of macroeconomic factors, all data in the industry point to a recovery that is gathering momentum over the last 3 to 4 quarters.

Turning now to some comments on themes within our results.

We are seeing a traditional V-shaped recovery in two markets.

One is surprising and one is not.

The not-surprising is Asia.

As we know from newspaper headlines, the rapid economic growth in Asia is one of the big stories of this recovery.

Not just in our industry, but in any industry.

Clearly we saw the benefit of that in our second quarter.

The surprising market is the UK.

The market for recruitment services is showing a strong upward trend, with most of our competitors reporting increases in the mid-teens, in terms of revenue or gross margins.

However, Hudson UK was up 35% in GM versus prior year, outpacing all of our major competitors bar one, with whom we are running neck-in-neck.

In Australia, we see a recovery that is gathering momentum, as permanent recruitment was up strongly in the quarter, offset by the lingering effects of the slowdown in outplacement.

Both of which are indicative of a recovery cycle.

In Europe, excluding the Netherlands, revenues and profits improved compared to prior-year, with the benefit of the expense reductions of last year.

However, we see signs of a recovery gathering momentum in our major markets, except for the Netherlands.

Let me just spend one moment commenting on the Netherlands, which many Americans think of as a small country.

But in our industry, the Netherlands is a major component of European staffing.

The market has lagged recovery since it is a services-dominated economy.

And the increased competition and weak demand in the public sector has also hurt our results.

All of our major competitors have reported weak results in the Netherlands after a surprisingly strong 2009.

In North America, legal rebounded well in the second quarter.

We are likely to open an additional review center in Q3 on the basis of client demand for our services.

Our business in North America is focused on the small- and medium-enterprise market.

And that's the market that has lagged the recovery cycle.

Unfortunately, it's hurting our results.

With that, I'm going to turn it over to Mary Jane Raymond to talk about our financial results for the quarter in more detail.

Thanks, Jon.

Good morning.

The slides for the earnings call are posted on our website, Hudson.com.

They start with a sequential comparison to the first quarter, and then move on to a comparison to prior-year.

As Jon discussed, we are seeing improving conditions in many of our markets.

A few key points for the quarter, in terms of the earnings delivery, are as follows.

First of all, revenue.

The Q2 revenue showed a typical sequential pickup to Q1, showing the seasonal lift that we tend to see in the second quarter over the first quarter.

Sequentially the revenue grew 8% on a reported basis and 12% in constant currency.

With the gross margin up 12% on a reported basis, and 16% in constant currency.

Firm revenue grew 23% sequentially and 44% over prior-year.

The temp margin was down 130 basis points on a constant currency basis, when compared to the second quarter of 2009.

Still reflecting some negative mix variance, as well as pricing pressure from our larger, more procurement-driven clients.

Having said that, the overall gross margin grew 120 basis points year-on-year, more than offsetting the entire temp firm margin decline.

We had 91% operating leverage in constant currency compared to prior-year at the old adjusted EBITDA level.

This means gross margin less SG&A.

So trying get as close to the trading results of the operations.

This is without the benefit of a large restructuring charge difference year-on-year, and without the benefit of the non-op income.

The leverage is even greater when we consider the non-recurrence of a net $4.5 million in restructuring and goodwill charges that we had last second quarter, as we note in the shareholder's letter.

We had $600,000 in restructuring charges this quarter, which is a revised estimate for a lease charge.

It's for the free rent period we expect for a newly vacated property that we'll sublease.

The non-op income is $845,000.

It's $185,000 for the third of four years of tax rebates in China; assuming the program continues.

And also for currency gains, mainly for inter-Company loans between the UK and Continental Europe that reflect the drop in the relative exchange rate between the sterling and the euro during the second quarter.

A couple of additional pieces of color for you.

We're asked pretty often about our public-sector business, particularly in the UK, which was a good help to us last year.

Our public-sector business in the UK is just under GBP3 million sterling in revenue, for the first half of the year.

So while this is likely to decline in the second half, and possibly beyond due to other government's austerity program, we expect that we will offset these declines via growth in the other practice groups in the UK.

The composite tax expense in the quarter was $515,000.

Virtually all of this was income tax for tax-paying entities which were profitable in the quarter.

For the entities in a loss situation, we were not able to benefit those losses in this quarter to any great extent.

Our outlook for the full-year tax provision is unchanged from last quarter.

$1.5 million to $2 million.

We continue to refine our corporate management cost-allocation to the regions to reflect the increased time spent by corporate resources on regional matters.

This is as a result of the management reductions that took place in 2008 and 2009.

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

The accompanying tables in the shareholder letter lay out for you the profit contribution of our operations, as well as the non-op details, which include the corporate management charge.

In the first quarter, our estimate for these corporate allocations was that it would be at least $8 million for the year 2010.

Our estimate at this point revised in the second quarter is that that number will be $11 million for the year 2010.

Regarding the non-op expense as a general matter, not including the corporate allocations, we have had a second quarter in a row of a good positive number.

These numbers have been influenced by one-time gains in both the first and the second quarter.

In the first quarter, the reported gain was largely for the redemption of warrants.

And in this quarter, we had as I discussed briefly a few minutes ago, a foreign exchange gain on loans between the UK and Continental Europe, and the Chinese tax rebates.

I don't expect this level of non-op income to continue in the third quarter, or really generally at that sort of level.

The cash flow from operations was a use of cash of $5.8 million in the quarter.

A quarter that had $15 million of revenue growth, and very close to our expectation of using $5 million in cash.

The DSO deteriorated 1 day compared to prior-year, because we had a few large client payments that fell into Q3 that have actually all now been collected.

We paid down $2 million of our restructuring reserve during the quarter.

The balance of that reserve, which was $8 million at the end of 2009 is now about $4 million.

And we expect to pay out about 2 million of that throughout the second half of the year.

We completed our equity raise in April, and except for a few short days more or less recently, we've traded above the transaction price.

Additional availability under our credit facilities is $19 million, with a borrowing base of June (ph).

This includes $15.2 million from the largest two facilities that encompass the countries of the US, the UK and Australia, and another $3.8 million from our smaller, local facilities.

Our Australian facility is new, as we note in the press release, signed this way to capture better terms.

Turning to guidance, for the third quarter, our revenue guidance is $190 million to $200 million, with a small position EBITDA expected at prevailing exchange rates.

This compares to revenue of $170 million, and an EBITDA loss of $6 million last year in the same period.

The Q3 2009 EBITDA loss included $2.9 million of restructuring charges.

This revenue growth is 12 to 18% over prior-year, and flat to the second quarter.

While good, especially for a third quarter, the third quarter as a general matter is subject to more variations than the second quarter due to the summer holidays that tend to prevail in the countries in the northern hemisphere.

This is likely, for example, to affect our perm business in Europe.

(technical difficulties)

Operator?

Yes, sir.

One moment.

Operator, let us know when the line is clear; thank you.

Okay.

Go ahead, sir.

Thank you very much.

Just continuing, I was saying that the third quarter is subject to more variation -- the revenue line -- than the second quarter, largely due to the holidays that are experienced in the countries in the northern hemisphere during the summer.

And is likely, for example, to have impacts on our perm business and revenue.

Our EBITDA, therefore, is likely to be lower than the second quarter because of that, but also due to some increased expense for the improvements in the credit facility.

And in some of our stronger markets, some modest investments to keep up with demand.

In terms of how this revenue guidance may play out roughly, just in terms of general direction, we'd expect the revenue growth compared to prior-year to be along the lines of the following --

10 to 15% in Europe, with growth continuing to come from the UK.

17 to 22% in ANZ, where we're starting to see momentum building in contract, as well as perm.

10 to 15% in Asia, as they anniversary their recovery.

Q3 for us last year was 20% over the second quarter of 2009.

For North America, we expect the growth to be 12 to 15%, as legal continues to strengthen.

This contrasts to the growth that we would've been in prior-year for North America in the second quarter, largely because between the second and third quarter of last year there was an $8 million drop in the North America revenue as the recession really took hold there.

These directional comments by region, of course, may vary as the quarter unfolds.

We won't update them, if we do.

But I think to provide you some concept, that's roughly how we would expect the third quarter to play out.

In Q3, we expect the cash to be in the region of breakeven, including paying out about another $1 million of restructuring charge.

With that, I'll turn it back to Jon.

Thank you very much, Mary Jane.

Operator, with that, we're ready for q-and-a.

Ladies and gentlemen, at this time, if you would like to ask a question, please press *, followed by the number 1 on your telephone keypad.

Again, that's *1 to ask a question.

Your first question comes from the line of Mark Marcon with Baird.

Good morning.

Nice progress.

I was wondering if you could talk a little bit more about the UK and particularly the government business.

What sort of margins does that have?

And how easy will that be to offset?

Mark, I don't think we have any data on the margin in the UK.

I'd just point out, Mary Jane gave you the numbers with respect to the gross margin that we earned in fees in the first half of 2010, which was from memory, GBP 2.8 million in margin.

And we earned a little over GBP 6 million a year ago for the whole year.

We expect there'll be somewhere around GBP 5 million for this year, for 2010; so a drop of 15-20%.

But clearly we're seeing the impact, as we said, of the austerity plan.

I think because of the growth in our other business that that business has declined from 23% to 15% of our gross margin in the first half of the year.

And we think it's not going to go to zero, but we think it is going to decline over the course of the half-year and over the course of the next couple of years.

So the one thing I would say in terms of the profitability of the business, everybody commonly says about the business that the margins are lower than our prevailing business.

But we don't have any data; not dramatically lower, I don't think.

But we don't have any data on it.

Okay.

But it doesn't sound like it's a dramatic drop that you're expecting there.

Just to further clarify, it sounds like we're just talking about going from potentially 6 to 5.

So not insignificant, but certainly nothing that you can't overcome with the rest of the business in the UK continuing to do well.

That's right.

That's the way we feel.

If I had to look out next year, I would say the way to think about it is going from 5 to 2 would be possible next year.

We expect the cuts to be hitting a lot harder next year.

And the cuts basically indicating a reduction in demand for additional hiring.

It's not the end of hiring.

We continue to get orders now.

We got a very nice order last week for more than 10 roles from one particular agency.

And public-sector covers a giant range, ranging from the police forces to the central government to the local borough governments.

It's a giant range, and not all of them are affected the same way.

But I think for investors to make this kind of cut-to-the-chase, I think it's safer to assume that there's going to be a reduction.

We obviously are pretty broadly spread.

We don't feel we have any great concentration among, "clients," within the public sector.

Nor geographically.

But I think given the tide; the tide, in this case, is moving against us.

But as you say, that is the way we feel.

The strength of our other business is enough to overcome that.

Great.

And can you talk a little bit more about Australia in terms of the contract business coming back?

First of all, why did it slow down and why is it coming back now?

Well, I don't have a good reason for why it slowed down.

I think the contract business generally in professional has been slower in this recovery.

You know, as I said to you in my opening remarks, everybody always thinks it lags.

And I think it is clearly lagging.

I think if you look at the results of all of our competitors, you see that, as well.

I think conversely, the perm business surprisingly has been very strong, and it was very strong in Q2 for us in Australia.

We're up over 40% in perm.

So one of the things we see is the beginnings.

The signs of a recovering contract in Australia.

And that would be a very positive sign for our business.

So in the quarter, my recollection; I think Mary Jane has the number, here.

My recollection, we were about flat in contracting Q2 versus prior-year.

She's shaking her head that that's right.

So I don't think it went; I mean I think it got hurt in the recession like everything else.

It just has not bounced back, yet.

Again, I don't have anything more specific than to say it is typical of professional contracting that we've seen throughout this cycle and in many geographies and in many companies.

Okay.

But you're now seeing the orders are starting to pick up?

I would say this is the first quarter where we're seeing signs.

I don't want to get too carried away now.

But we feel more confident about contracting in Australia as we look out to the third quarter.

And we are seeing signs of an improvement.

Great.

I would say -- Mark -- just to my add a tad bit of color to that.

I mean if you think about our Australian business, right?

It has three elements to it.

The contracting, the perm and talent management.

And in our talent management business, that includes out-placement.

Yes.

So while we see a typical drop, for example, in Q1, the way to think about contracting is that it's really been kind of just steadily hanging in there.

It hasn't showed a good or a big uptick with respect to the recovery.

It's just stayed pretty steady as opposed to falling.

Whereas perm has really come up very much.

The offset to that for Australia in general has been that the outplacement business, as you know, which comes up like a spike and then falls, will effectively be anniversaried after this second quarter.

So we'll be back to more of the more normal time mix by the time we get into the third quarter.

Great.

And what is the outplacement down to?

Well, at this point, the outplacement business is probably virtually certainly under $1 million if not under $0.5 million dollars.

And we anniversaried about $1.2 million to $1.8 million last year.

Great.

So I mean we're done with that.

We don't have to worry about that as being a drag any more.

Contract's getting better and perm isn't showing any signs of slowing down.

That's right.

Okay.

Great.

And then can you talk a little bit?

One thing I was unclear on and the team here was unclear on was, Mary Jane, at one point you made some reference to corporate expenses and you said something about going from 8 to 11.

I wasn't quite sure exactly what you were referencing.

Sorry.

Okay.

So the corporate expense as a total matter was about $4.5 million in the quarter.

I'll get you the exact number in a second, here.

But basically, so if you think about that over the year, the corporate expense is going to be somewhere between $17 million and $18 million.

That's the total expense all-in, no allocations.

Pretty consistent with where we expected it to be.

What we began to examine in the first part of the year was the allocation of that out to the field.

And part of that is because the corporate resources have spent more time on various regional activities with the reduction in the management ranks in the regions in the last couple of years.

The allocation of that, so take our call it $17 million total.

In Q1, we had expected that over the year we would allocate out $8 million of that to the regional operations.

The allocation of $8 million has been revised to $11 million.

So of the roughly $17 million in total, we'll be allocating $11 million of that out to the regions, to get a better match between their revenue and the expenses.

Does that make sense?

It does.

And so the corporate expense that you will not be allocating out; what will that be specifically composed of?

Well, obviously there are things we do in corporate that I think per the rules that we follow when you look at allocations out to the field, do not specifically benefit the operations.

They do indirectly, obviously.

So for example, our board management process and our investor relations management process is important to our entire company.

But it's hard to say it benefits the UK precisely this way.

Right.

Okay?

It's really more like that.

Got it.

Got it.

Great.

I will hop off and jump back in the queue.

Okay.

Once again, ladies and gentlemen, if you would like to ask a question, please press *1.

Again, that's *1 to ask a question.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much.

Mary Jane, you were kind enough to give us a little bit of color what you were expecting sequentially on the revenue line by segment.

Can we get some similar color in terms of the EBITDA levels?

I think what we can expect is that the EBITDA will play out on that sort of revenue list pretty much similar to what we have seen in other quarters.

So it'll probably be pretty proportional to that.

If you think about it, the revenue in general is kind of flat against second quarter.

So then kind of the EBITDA fall out from that is probably somewhat proportional then to the second quarter, as well.

With countries like Singapore, for example, or the UK, for example, which have had positive growth in earnings for now three quarters, with very, very little addition of people, probably being the sort of markets that may have some modest additions of people, as we go through the third quarter.

Does that help?

Yes.

Actually, that is helpful.

Jon, I think in your remarks, and forgive me if I didn't hear this correctly.

I think you said you were opening up another center in North America?

What exactly was that?

I'm sorry, Jeff.

Could you say that again?

I thought I heard you say, but are you opening up another center in North America?

Maybe I misheard you.

No; we are.

We're opening up another review center.

I don't know how granular you want to get about our North American operation, but we have not generally had very many review centers.

I think we have two at the moment.

I think.

One in Charlotte; one in Pittsburgh.

Historically, there was a trend in our business of some of our competitors opening up quite a few review centers.

We did not do that historically.

We pretty much operated on a different model.

But as time has gone on, it turns out we found an opportunity and we have a customer that will, while they're not committing to fill up the center, will give us a good head start on filling it up.

So I think the reason I mentioned it is that it's indicative of demand picking up in the legal market that we of all people, who have been reluctant to open review centers, will be opening one.

Okay.

That's actually helpful.

Are you seeing anything along those lines in any other of your either geographic regions or functional areas where you might have to start opening up new offices because demand is so strong?

We are looking at it.

We actually are looking at new offices.

We're particularly looking at new offices in the UK.

And I don't want to give away too much competitive intelligence, but if you look at our network in the UK, I think we're well behind what we would consider our principle competitors.

And in the UK, we would certainly consider our competitors to be Michael Page and Robert Walters.

Also, Hayes, to some extent.

To some extent, S3; to some extent, Morgan McKinley.

But we think of it as Page and Walters as being serious competitors.

Page is much bigger than we are, so they're a role model.

But when we look at their networks and when we look at our networks, we see the fact that we have less offices.

We feel our network is not as strong as it should be.

So as we're doing well in the UK, we have a strong team, we have momentum.

We will be opening more offices.

And we opened an additional office last week officially in Bristol, which I believe is one of the strongest regional markets in the UK.

And we will open some more basically as conditions warrant over the course of the next I would say 2 to 3 years.

If we get up and do as well as we think we'll do and we get to breakeven as quickly as we think we will in Bristol, then we'll turn around and open another office pretty quickly.

But I think there's quite a good opportunity for us as a company in the UK, in the sense that it's a half-full-half-empty glass.

In the sense that our network is just not as strong.

We are not going to be in 400 locations like the High Street companies.

But we should be in 8 or 10 in England and 3 or another couple in Scotland and another couple in Ireland.

All right.

Great.

Sorry, Mary Jane, just one more follow-up for you.

When you were talking about the non-operating income line, you said that you don't expect it to continue at that level.

I know this one is hard to model, but what would be a normalized level that we should be using?

It's been having a disproportionate impact on adjusted EBITDA.

Well, I think probably normally, I mean, some of the things I've said in the past is, it's probably plus-or-minus $1 million.

But obviously what we've seen is that that's probably on the high side.

I mean it's probably a couple hundred thousand, either way.

And the thing that is tough to gauge is we try not to hold multicurrency short-term loans between the countries, because they're affected by currency affects.

And that's what's going through that line.

This month it happened to be pretty bigly positive.

But given that it could easily go in the other direction, we're trying to keep that kind of low.

So I'd say within the range of a couple hundred thousand dollars.

And it could go either way.

And if the currencies stay a little more stable of course, here in second quarter I would expect it would be pretty low.

Okay.

Great.

That's very helpful.

Thanks so much.

Sure.

Actually, guys, I just want to clarify one thing.

Mark was asking about kind of the mix of business in contracting in Australia.

I was talking about the outplacement business now being down to probably less than $0.5 million if not maybe even less than that.

I was trying to speak to the variance; just so I didn't confuse you about the outplacement portion of talent management compared to prior-year.

The talent management business overall in Australia is actually a very good business for us.

And outplacement's just one part of it.

In fact, I would expect that the gross margin for that business just to illustrate it is in the range of about $3-ish million.

And we expect to grow from there, actually, as the assessment and development side of the talent management grows in the third quarter.

So I didn't want to leave you with the impression that the gross margin for talent management overall was floating down to zero, because it's not.

In fact, with anniversary the peak of outplacement and the other part of the business; the assessment and development, which is actually the larger piece or the more steady piece; it's coming back very nicely here in the second quarter and the third.

Okay, Operator.

I think we're ready for the next question.

We have a follow-up question from the line of Mark Marcon with Baird.

Okay.

Hi.

I was wondering if we could follow-up on Jeff's question, just on the EBITDA.

I mean when we take a look at the revenue guidance relative to what you did this quarter, I certainly understand the seasonality as it relates to perm.

Particularly in Europe.

But can you give us a little bit more of a sense in terms of we're talking about roughly breakeven.

But can we put a little finer tune on that in terms of specific areas where you would expect to be profitable versus perhaps having a bit of a loss?

Well, I think the way to think about it is first of all with respect to the kind of whole Asia-Pacific area taking ANZ onboard in Asia, that's probably going to be borderline very steady with respect to the second quarter.

Not so affected by the vacation period.

Likely, what will happen is the mix of the revenues will go down in Europe.

Right?

For the third quarter.

Yes.

So we'll see the profits go down there accordingly.

And that may be they would call it $4-ish million for the second quarter, down to $1 million or less, let's call it, for them.

Having said that, North America, which posted a loss in this quarter, we would expect to see coming back into a positive territory.

They continue to struggle, as Jon said, but I think nonetheless, they should be in positive territory; probably in the $0.5-million-ish sort of range.

And then from there, in corporate, I would expect corporate to be kind of flat to the second quarter.

So I think basically what we're really seeing is some tradeoff between Europe and North America with the other guys contributing pretty steadily to where they were, including corporate.

Obviously that's directional.

It makes a big difference where POM (ph) comes out.

That's the thing that's pretty hard to call.

As most of you know, the whole business, the whole industry is lowish the first two months, with a strong third month.

That is absolutely no more true.

The biggest month that's true for is September.

So I think generally speaking, we'll see improvements in North America which we've all been waiting for, and some declines in Europe.

That's very helpful.

So if I put all that together and I'm interpreting what you're saying correctly, it actually sounds like we'll probably be north of breakeven.

Well, I think one of the things we're trying to figure out; Jon talked about the fact that we have just opened an office in Bristol.

I mean three consecutive quarters of growth with trying to hold the expenses where they are.

Including the actual physical people.

That is something that I think we really have to look at.

So I don't want to go too far from small positive.

And obviously we're not going to cement regional guidance down to the EBITDA level.

But generally speaking, obviously this Company is very focused on having a profitable outcome this year.

This Company is very focused on being profitable in the quarters.

We will be working as hard to get that number north of zero as possible, but we're not going to commit a strong way away from it.

Okay.

And then as it relates to North America, how should we think about the long-term profitability of the region, and what strategically could you do to potentially improve the profitability there?

Well, I think one of the challenges we have in North America, Mark, is as I mentioned in my remarks.

It's that we have been as a matter of our business model focused on the SME market.

And if you look at the three components of our business, legal which has done pretty well, that's actually a business not focused on the SME markets.

So as soon as I said that, legal is not.

But legal has done pretty well and shown good bounce in the recovery.

In our IT and accounting business, we are focused on the SME market.

That is the market that has lagged the recovery.

And accounting, as you know, everybody in the industry is still -- I don't know if they're still reporting declines, but when you have the largest companies in the industry reporting declining revenues in the second quarter, it's telling you that the market is not yet recovering.

And it's just not unexpected.

I mean you yourself have written about it.

Just lagging the recovery, as typically it does.

Obviously everybody's commented on the dearth of projects.

The decline of SOx and other things affecting accounting.

Yes.

Which may bode for even a slower recovery.

And that's had an impact on that part of our business.

The IT part of our business, we do know that most of our competitors are doing better in IT than we are.

We did have a little bit of a tick up at Q2 versus Q1.

But still trailing our competitors.

However, we are really exclusively focused on that business on the SME market.

So I think our feeling is we have to fight our way through it.

We are, all of us in management, including Stephan Carter the guy that runs North America, we are all disappointed with the results.

But to do substantially better, we have to see a recovery in the general economy that would drive that business.

Okay.

And so Jon, you're as close as any top manager in the industry to what's happening from a macro perspective.

And obviously the consensus is for slow growth going forward.

And that's obviously with a wide range of possibilities.

But I don't think anybody's calling for spectacular growth.

So under those circumstances, how do you envision the Americas business proceeding?

Particularly given that there is a lack of secular positive?

Particularly on the F&A side for you?

Yes.

Well, I think first of all, the bottom line is that it's going to be a slow grind in this particular business, given our business model.

But what I would say is, there is a difference between the general economy and the small business market or the SME market.

I think there is a demand for IT services among SME companies.

Yes.

But I think the problem is that those companies were so battered by the recession that they're still hunkered down to just recover.

They've struggled to survive, and they've survived.

But as you'd say in the financial world, they're rebuilding their balance sheet.

And they're being careful about spending money on things that are not mission-critical.

Moving to, as a metaphor, to Windows 7 is not mission-critical.

Nobody's company is going to collapse because they're working on an older edition of Windows.

And that's a metaphor.

I'm not specifically picking on Windows.

But it's a metaphor for what people are willing to spend.

And I think the bigger companies feel that they have the money to spend.

They have the balance sheets to support it and so forth.

So I don't think we need as much a huge -- of course, an economic recovery is always welcome.

But I think the real question is, "When does small business begin to get better and get well enough that they begin to spend?" In turn, that will help our business, and in turn, it will help the economy.

But I'd say my bottom line is, I think it's a ways off.

Because as you point out and you pointed out it many things you've written, the indicators right now are just not showing that much strength in the overall economy.

Is it possible to shift some of it, at least on the IT side?

Some of the marketing efforts toward larger accounts that maybe where they aren't locked up in vendor management agreements?

Yes.

It sounds like everybody else in IT is doing extremely well.

They are.

Well, they're certainly doing better than we are.

Without question.

I think that the problem; I wish I could say yes.

But the truth is, when you look at what the competitive reality is in those accounts, it's not just a question of deciding to go for it.

It's a question of having the support systems and the infrastructure and the whole business model to support that kind of business.

Originally when I came to Hudson, the reason we didn't go into that business eight years ago was that I thought it was already a crowded field, and we were a late entrant, and we were going up against companies that had far more financial resources.

And this is a relatively small part of our business.

So I was reluctant to get into an arms war with bigger companies that have a lot more money and have customer relationships, et cetera.

I think that strategy just in the abstract is a good strategy.

But it's not consistent with where the market is right now.

So I think we're just going to have to soldier through it and hope the rest of our business grows faster as it has shown it can, as we come out of this recession.

Great.

And then can you tell me, Asia-Pac obviously that's a shining star.

In terms particularly the Asia proper.

Can you talk about what we can hope for in terms of longer-term growth?

How much capacity do you have there?

Can you keep this up?

Or how should we think about it?

Well, I think it's one of my competitors, and I know you know this executive.

I won't name him.

But he said that Asia had unlimited potential for our industry.

And I think that's clearly an easy truism.

This is a very fast-growing market.

We are really, all of us in the industry, scraping just the top part of the market at this point.

This market will mature and become a very good market.

And obviously when you're growing, this quarter we grew over 50% in GM in Asia.

It's becoming a major part of our business.

So I think it has the potential.

The margins are high.

I think we called attention in our shareholder letter to our EBITDA margin in Asia.

It was 16% for the quarter.

Yes.

So we're producing good profits.

We're at the point where to do more business, we're going to be adding people.

That's a high-class problem to have.

But that's our view of it.

That's our business.

Adding people; adding offices.

That's the fastest way and I think the easiest way to make more money.

Because you have the momentum; you have the brand name; you have the business.

That's the way all of us are going to go.

So I think we as an industry have a great opportunity in Asia.

We as a Company have a strong business in Singapore.

I think it's not a market-leading, but a market-leading business if not the market-leading business.

We have obviously a very strong business in China, where we would say we are the leading business in China, bar a domestic company that we don't consider a competitor.

But to be fair, they're bigger than we are.

We have focused more on China than Japan.

We may go back to Japan, because that's still a base of business that's interesting to us.

But China has been the place where we've focused our energies.

As you know, we made an acquisition that's worked out very well for us.

It's put us in IT, which has been a very good place for us.

So yes, we're very positive on that market as we look out over the next decade.

I think we can see very strong growth.

If you look at what's happened just in the eight years I've been here, China was -- when I came here -- we had eight people in our Shanghai office.

We had one office; we had eight people in the office.

I don't know how many people we have in our office today, but it's a lot of people.

And it's become, China is in our top 10 businesses now in terms of EBITDA production.

And we're not alone.

This market's been a good market to be in, and I think we have a good position in it.

It certainly seems that way.

That's why I was trying to figure out how.

It seems like the demand is there; just what's the constraint in terms of capacity and the ability to continue to fill that capacity.

I'm not sure in terms of what the DSOs are like or what sort of capital requirements you have over there.

I was just trying to get a sense for that, just in terms of can you can you keep up this level of growth if the demand is there?

Or are there some constraints that would prohibit you from doing that?

Well, I think there's always the management constraint.

But we have a good team of managers there.

We have a good management team in Asia, generally.

So David hands me a sheet that says we're up to 80 people in our Chinese operation from 8 that were in the office when I joined.

So you know an interesting statistic, and I don't know it, so I won't get it right, but there's something like 20 cities in China that have a population over 5 million.

And that's our opportunity; that's our market.

That's the market that we play in.

So we're currently in two of them.

And the challenge for us will be when we open Number 3, and then Number 4 and then so forth.

But that's how we drive our business.

Great.

Thanks.

I'll follow up offline.

Thanks.

Okay.

And again, ladies and gentlemen, that's *1 to ask a question.

And you have no further questions at this time.

Okay.

Thank you very much, Operator.

Before turning it over to David for the closing remarks, let me just make a short conclusion.

I think it's important to draw the attention of investors to the fact that in the markets in which we are experiencing a recovery, we are delivering sharp profit improvement to the bottom line.

That's an important indicator that we are, "on track," to deliver improved profitability in the next cycle.

In the other markets with slower recovery cycles, we are delivering profit improvements as a function of expense reductions and the revenue growth that's available.

We're in the markets that are recovering strongly.

We're at the stage where we will being to add people to drive further profit growth over the next year and beyond.

I also want to thank our team around the world for their efforts over the last quarter, because of course they're fundamental to the success that we've been able to achieve.

As one of our analysts pointed out, we believe this to be true, our Company reached an inflection point in the second quarter in terms of profitability.

We expect, as we've said, to be profitable for the year, and we expect to be profitable for each quarter remaining in the year.

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

Thank you, Jon.

I'll make one correction.

The Chinese staff growth that I handed Jon -- that's actually closer to 150 staff these days; up from the 8 when Jon joined.

Even faster than the number we gave you a moment ago.

Thank you all for joining the Hudson Highland Group's second quarter conference call.

Our call has been recorded and the replay will be available later today on the investor section of our website at Hudson.com.

Thank you and have a great day.

Ladies and gentlemen, this concludes today's Hudson Highland Group's Second Quarter 2010 Earnings Results Conference Call.

You may now disconnect.