Hudson Global, Inc.
Q1 2008 Earnings Call Transcript

Published: 26 May 2008

[Operator:]

Good morning. My name is Crystal 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 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.

[David Kirby:]

Thank you very much operator, and good morning everyone. Welcome to the Hudson Highland Group conference call for the first 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 accept for historical information, statements made during the presentation constitute forward-looking statements under applicable securities laws. Such forward-looking statements involve certain risks and uncertainties, including statements regarding the company's strategic direction, prospects and future results. Certain factors including factors outside of our control may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which we operate, risks associated with acquisitions, competition, seasonality, and the other risks discussed in our filings made with the SEC. These forward-looking statements speak only as of today. The Company assumes no obligation and expressly disclaims any obligation to review or confirm 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.

[Jon Chait:]

Thank you very much, David. As is our custom, I will comment on some broader issues impacting the company. And afterwards, Mary Jane Raymond, our CFO, will comment on a detailed analysis on the numbers. I assume that all of you have had a chance to read our release and shareholder letter published yesterday after the close of business. If not, it is available on our website. As results are released in our industry, investors continue to focus on the questions of, are we in a recession, how deep and how long, and what will be the impact? Our stock price and virtually our entire industry discounted a [deep], if not catastrophic global recession. Of course, we don't have any answers to the academic question of whether we are in a recession, but I want to spend some time this morning discussing the current economic trends as they impact our business. As I've said in every investor presentation that I have made since I became Chief Executive, this is a cyclical industry, and permanent recruitment which accounts for more than 50% of our gross margin is the most sensitive of all portions of the industry. In fact, permanent recruitment is so sensitive that it is impacted by uncertainty long before the actual event of recession. The reason is simple, but profound. If managers are uncertain about the future, they don't want to add to headcount. This period, if it is a recession, is not the same as past recessions or slowdowns. In 1990 and 2001, the most recent recessions, there were precipitous declines in permanent hiring accompanied by massive lay-offs in many industries with unemployment rates soaring in many countries. In the end, it took years for the hiring trends to recover in our industry. These factors have simply not occurred in this downturn. That would be very unusual if this indeed was a recession. Permanent hiring has been softer, but not plummeting. One has to ask today, why would any company be hiring anybody in view of the massive and well publicized uncertainty? The only answer can be that critical hires are still being made, and the long-term skill shortage has caused many companies to look at this as a "buying opportunity". Second, corporate profits have been relatively strong outside of a few sectors, particularly financial services and mortgage related. Thirdly, lay-offs have been few, again, outside of the same few sectors. Let's dwell on the last two recessions for a moment. The 1990 recession was 17 years ago. There are not many things that are the same today as they were 17 years ago, except the name of the President of the United States. The specialized staffing industry was in its infancy at that time. Many of the companies in our industry did not exist, and those that did were tiny. It's not very relevant to the industry or the economy of the 21st century. This is not the economy of 1990, pre-China, just after the fall of the Iron Curtain, free internet, or at least the widespread adoption of the internet, and on the eve of a short Gulf War. The 2001 recession was tied to the internet meltdown. You might be tempted to analogize the subprime catastrophe to the internet level, but again I think there is no real comparison. The internet bubble burst had the impact of destroying many customers of our industry. Thousands of companies that were buying contractor services or hiring people went out of business. Indeed, the subprime crisis is cutting a wide swath across the global financial infrastructure, but it is not decimating employment on the same scale, even in the financial services sector. The other feature of the 2001 recession, which is often ignored by analysts, is the impact of the terrorists attack in September of that year. That attack created unprecedented stresses in the US and by derivation, the global economy. There is simply no precedent to compare to. Today's economy is one of cross-currents. The negatives are well known. Financial services, residential construction, and certain industries are in the midst of consolidation or technological change, such as telecommunication. But strong countervailing forces are also in place. At the present, unemployment remains muted by historic standards. Underemployment has risen this is partly impact of the evolving US labor market, and partly a fact of a market in continuing transition from a manufacturing base to a knowledge base. All of these factors make for a very uneven and volatile mix that ripples through our business and many others in our industry. These factors affected our business in the first quarter, and we expect them to remain in place in the second, not because we have any particularly brilliant insights into the future, but we are weary of calling the turn prematurely in advance of any supporting data. There are a number of aspects of the quarter that I want to comment on, at least briefly. During the quarter, we experienced a cutback in hiring in the financial services industry, but the extent of that action varied widely, even within a single institution, much less a single geography. The impact on Hudson depended on the extent of our exposure to that industry in a particular geography, and the posture of a specific institution. In many cases, in many places, business was, "down but not out", within that sector. It would be wrong to attempt a macro over generalization. In North America and Perm, as you can see from our numbers, we were down year-on-year, but importantly, the seasonal trend remained intact. March was the strongest month of the quarter. If we were in a recession, this would look the reverse. Again, retain search in North America held up year-on-year. Again this would be reversed if we were in a recession. Our North American legal business had a great quarter. I would never say that any business is not cyclical, but this is a business that is not tied to the economy, but to the vicissitudes of complex litigation. In the long-term, it has good prospects for growth, but in any quarter it can be good or bad. In the first quarter, it was very good. In continental Europe, I just remind you that these remain separate markets, although there are more common elements from an economic standpoint than ever before, not just the currency. For Hudson, our big three markets are Belgium, [Balance] and France, which are 75% of our gross margin in continental Europe. France and Balance had significant improvement in gross margin and EBITDA in the quarter. While Belgium had some softness, it still did well. All of the reporting units were profitable in the continental European region and in Europe as a whole, which is an encouraging sign. Government hiring trends were mixed in the quarter across the globe. We have invested in this sector as an anti-recessionary hedge. It's an investment that we've been making over a long period of time. In a soft economy, government spending is maintained and even increased as an economic stimulus. Once in a while it is negative, usually associated with changes in government, as governments re-evaluate hiring and priorities. At the moment, we are living through governmental change in two markets that are important to Hudson, Belgium and Australia. Government policies affect hiring in many direct and indirect ways. In the longer term, we believe it's an asset in a weak economy. In Australia/New Zealand, it wasn't our best quarter although it wasn't that bad either as we remain strongly profitable. But we have a volatile business, due to the high percentage of permanent recruitment. I would discourage any of you from extrapolating from the quarter across the year, because the results in the quarter do not reflect any fundamental trends in the Australian economy. For example, we had a noticeable improvement on the top line in April in Australia. Trends in April, basically, we have not seen any change in any of our markets in April. That means that at least for now, we don't see a clip in front of us. Frankly, we don't have that much visibility. Even order inflow is not a reliable indicator because at a slow economy decision making can be deferred or orders cancelled. Could there be a cliff looming the future? Or could there be a recover? I am inclined to think the latter. In Hudson, our geographic diversity is maddening to investors and analysts at times, but that diversity and our focus on specialized professional services is strongly cushioning us from the volatility in any one market. Simply put, that was the story of the first quarter. And with that, I'll turn it over to Mary Jane to do a detailed analysis of our reported financial results. Mary Jane?

[Mary Jane Raymond:]

Thanks, Jon. Good morning. Jon just reviewed for us a range of economic conditions that were present in our quarter. Amid those, however, we delivered solid increases in Q1, compared to a year ago in every key P&L measure from revenue to net income, again on a reported basis, and on a constant currency basis in our key profitability measures from adjusted EBITDA to net income. Financially, we can see our focus and specialization paying off. For the first quarter, gross margin grew in dollars 7.2%, growing faster than the revenue growth by 4 percentage points on a reported basis, and declined 1 percentage point on a constant currency basis, following a greater constant currency decline on revenue of 3 percentage points. Our temporary contracting gross margin advanced by a 110 basis points to 20.8, and total gross margin by about 160 points. On a constant currency basis, the temp contracting gross margin increased 110 points, while the total gross margin for the company increased about a 100 basis points. Overall, adjusted EBITDA margin was 2.3% for the quarter, an increase of 60 basis points from 1.7% a year ago. We experienced strength in continental Europe and Asia as Jon has just reviewed. In constant currency, Continental Europe grew revenue by 12% and gross margin by 13%. Asia grew revenue by 27% while gross margin was up 31%, again in constant currency. Australia/New Zealand constant currency revenue decline was about 9%, while the gross margin declined somewhat less, at about 6%. The main reason for this is actually mix. Jon has just mentioned that the economy of Australia remains fairly strong. We do have a large perm business there which can be volatile, as we saw particularly as example in the government sector in this quarter. While stressing that we don't see this as a company at a trend, I will score the numbers for you here, just a little bit. Half of the revenue decline was in low margin business that we purposely moved away from, and this shift alone had very little profit impact. The remaining impacts were from several small things, the largest of which was in talent management, where the strong economy at the present moment is driving lesser demand for out placement. Our cost re-engineering, it has mitigating the impacts of the gross margin decline. And we continue to work on improving the efficiency of our delivery methods and processes to ensure, one, that we are competitive in a very talent-short market, as well as to be sure that we are swift to the market. Those aspects become very important, again, particularly in a talent-short market. Hudson Americas made progress during the first quarter, driven by strength in legal as we have discussed. The practice has returned to more normalized levels, but this remains a market leader. And as Jon noted, while driven by litigation trends, it is somewhat less tied to the economic cycle. In the region as whole, North America, contract revenue increased 15%, while permanent recruitment declined netting a total revenue increase of 9% and a gross margin increase of 3% from the prior year. The permanent placement business in North America is pretty small. It makes up about 16% of the gross margin in the first quarter, and it was down about $3 million to the first quarter of '07. This was, as we noted in the shareholder letter, primarily due to two of our RPO clients taking the work back in-house. So not taking it to another company that does this work, just taking it back in-house a somewhat normal trend we can sometimes see with clients in the RPO space. Despite all of these kinds of countervailing forces, the EBITDA for this market was up $1.2 million -- increased to $1.2 million, up to $2.6 million from the prior year when we had a loss of $1.4 million. In the UK, they had the roughest quarter around the world. There was a confluence of events there as we've discussed. 50% of our London business -- our UK businesses is in London, and 25% of the UK in total is in the financial services sector. The slowness in the banking sector coupled with internal changes to geographically diversified from London, which you can see with it being 50% of our business today, did result in an 18% constant currency revenue decline. The gross margin decline accompanying this was about 17% below prior year. We expect to see progress in the second quarter by focusing on the areas where we see growth. Interestingly enough, some of these are outside of London, making our thought to focus geographically outside of London a good move, while caught in a bit of a timing conflict with the first quarter. Regarding other financials on the income statement, let me point out a few things to you. Our net income from continuing operations increased a 100%, and was up over 80% in constant currency. The total net income which includes the effects of discontinued operations, increased $1.4 million, up from roughly about breakeven a year ago. The depreciation was a little higher in this quarter, primarily due to some true-ups in our dilapidations provisions, as we view some leases which are about to expire. This isn't particularly a trend, just a true-up in this quarter. The net cash was $25 million at quarter end, and the cash flow from operations was a use of cash of $20 million. The primary driver of this was, as Jon mentioned, much of the increase in legal in Q1 was court dates at the end of the quarter with some of our clients. That resulted in those clients being billed at the end of March, that's actually what drove the accounts receivables up. I have spent a lot of time on these calls, talking to all of you about our focus on cash flow. So while I would say I am not particularly happy about this result, more importantly, I am also not particularly worried about it. It is particular to the quarter. The company is very focused on this and we will remain so. The Cap Ex in the quarter was about $2.2 million, consistent with our recent history. For the year, I still expect the capital expenditures to be between 10 and $12 million. DSO was up about one day to 61 days. Our tax provision in the year in Q1 was about $2 million, or down 15% from prior year, particularly on lesser international income. Few words, just on our Q1 initiatives, we did repurchase over 700,000 shares in our share, buyback program. That was about $5 million from the authorized $15 million. Generally speaking, I would expect to see us buying shares back in the future as the market conditions warrant. From our sale of the U.S Energy and Engineering business on February 4, two points to update. We did launch the reengineering that is associated with the restructuring charge; I will talk about in a minute, to help us offset the dilution of that divestiture. It is my expectation we will do that and we launch the entire program during the first quarter. Secondly, no, you were not dreaming it. I did indicate at year end that we expected to have a gain on this transaction. As we went through the final accounting on it and analyzed the goodwill assignable to this transaction, we did assign goodwill of $6.9 million, which is a non-cash charge which does render a loss on the sale of $0.6 million. For the restructuring program, the North America focused restructuring program launched in Q1 as I said, drove expenses of about $1.6 million for lease terminations and severance. We will probably see roughly about another $0.5 million in Q2 for the completion of these first quarter actions. Some of you might ask me with our having a range of 1 to $3 million, whether we felt like we got on with that program. We launched a very broad-based reengineering program in North America. We expect to see annualized savings out of that in the neighborhood of $5 million. As many of you know around the world, restructuring is not as expensive to do in the U.S market as it is sometimes internationally. What you should hear is that the whole program in North America was launched in Q1. I do expect over the year that we would have about $5 million to $7 million in restructuring actions, and the number is somewhere between $1 million and $2 million in the second quarter. Turning to the guidance. We expect the second quarter revenue to be between $300 million and $315 million, compared to about $298 million a year ago. We anticipate the second quarter adjusted EBITDA to be $10 million to $13 million compared to $12.2 million last year. With respect to the EBITDA range of $10 million to $13 million, that range both its width and the fact that it is bracketing the down side a little farther than the upside, has two main drivers. We continue to monitor the financial services impact, including whether that could have ripples outside the US, as we have seen I think both in past recessions and we saw in the first quarter as it affected our UK business. That is balanced by the strength of some of our businesses like legal, and even as I mentioned, some of the growing businesses in the UK which are nonetheless project-based. So while they are good, they are not necessarily that easy to predict. The company is, however, committed to deliver in 2008 earnings improvement over 2007. As Jon mentioned, we see nothing yet that changes our view that we should be able to do that. With that, let me open the line for questions.

[Jon Chait:]

Thank you, Mary Jane. Operator, we are ready for the Q&A session.

[Operator:]

(Operator Instructions). Your first question comes from the line of Tim McHugh with William Blair & Company.

[Tim McHugh:]

Yes, first I want to ask about the legal staffing business. Obviously, you had a very strong quarter. First, could you quantify at all the variance versus what you said would be a return to their normal run rate? How big it was then in the first quarter? As well as, if you look into the second quarter here, including April, do you see any other similar type of court dates upcoming that could have a positive impact on the business?

[Jon Chait:]

I don't know if Mary Jane has a specific number in mind, so I get to duck that question, Tim. I think as a general proposition, the difficulty with predicting this business is that we always have things coming and going. And we have a number of things in the pipeline that we are optimistic about. And as we said, we did get a surge of demand in the quarter for a particular client that had a court date right at the end of the quarter. So I did most to try to predict that, but I don't know if Mary Jane wants to try to refine that any more numerically.

[Mary Jane Raymond:]

I think with respect to your question about Q1, what was the extra revenue that we saw. It was roughly about $10 million. If you look at the legal business as we have seen it, it tends to run roughly $45 million or so a quarter. I think we would expect to see a continued growth in that business, which we are seeing. So, probably it's going to be in the range of somewhere around 60'ish, but not at the level -- not $10 million higher than that, which we saw in Q1.

[Tim McHugh:]

Okay. And then, could you elaborate a little more, you mentioned the weakness from the government and Australia, and how that differs from your view of the macro picture down there. I'd be curious if you could just give a little more detail on how those two trends diverge?

[Jon Chait:]

Sure. I think the -- my interpretation of the Australian economy is that it's a natural resources driven economy, and demand is being particularly strongly driven by China. I don't think that's a unique view, I think -- but that is my view. The government was recently changed over, and as part of that the government, as is frequently the case, is re-examining priorities in terms of spending and going slower on hiring. We have a very good business in Australia with respect to what we call the public sector or governmental hiring, as we do in many parts of Europe and we view that as a important specialization, because we think it cushions us from downturns. As I've said, once in a while when there is a change-over in government, there is a slowdown in hiring as every government, doesn't matter what party they are, what they are doing, every government legitimately begins to re-examine priorities. That's happening in Australia and that's had an impact in the first quarter. We do not expect it to be a long-term impact. The same was true in Belgium which is although a small country; it is an important country for our company. The Belgians had a situation much like what we had in the Bush/Gore race that was really very close, and they have had a coalition government in place that is probably not a long-term government, but in place after a very long hiatus. And that has also had some negative impact on governmental hiring, as priorities are uncertain. So, I think long-term we think that's a tremendous advantage. And long-term, we continue to promote that sector in all countries in which we operate, in all markets. It's not particularly an important business in the US, but where we can in the rest of the world, we do promote it. We think it's a hedge against recession.

[Tim McHugh:]

And then recognizing that you don't have a lot of visibility, how long do you think it takes for that business to come back? Are these things that you are expecting in your 2Q guidance here or is this more late 2008 or next year before the situation kind of normalizes?

[Jon Chait:]

We are not expecting it in Q2, but we do expect it to normalize in 2008.

[Tim McHugh:]

Okay. And then lastly for Mary Jane, I saw you repurchase some of the stock, but you still have two-thirds of that authorization remaining. What's your view of share repurchases at this point, once you do collect some of that cash that built up in receivables?

[Mary Jane Raymond:]

I think a few things. First of all, we are very confident in our company's performance irrespective of whether we have a share buyback program. As we discussed, when we started it, in an uncertain market, it's helpful to have that as a tool. I think we generally still think that can be an important thing to do, again, depending on market conditions. So I don't necessarily think every day we can be in the market, we will necessarily be in the market. We will do what I think all companies do, which is kind of look at the conditions and look at where that particular tool will help us. It is my expectation, however, that through the rest of this year, we will probably buy back more of the stock.

[Tim McHugh:]

Okay, great. Thank you.

[Mary Jane Raymond:]

Tim, let me just clarify one of your questions, with respect to the run rate in North America, etcetera, so the increase in the revenue in the first quarter was about $10 million. With respect to North America in general, I would expect to see the North America run rate going from roughly $80ish million in revenue or $83 million this quarter, down to round about $70 million or $73 million. So just clarifying that it's more about where I expect the North America run rate to be.

[Tim McHugh:]

Thanks.

[Operator:]

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

[Jeff Silber:]

Perfect. So I go on to my next question. Can you give us a little bit more color on expectations by the other two regions as well?

[Jon Chait:]

Talking about revenue expectations, Jeff?

[Jeff Silber:]

Revenue and then my next question was going to be on adjusted EBITDA, so you might as well just go through the whole thing.

[Mary Jane Raymond:]

Yeah, okay. First of all, we don't give guidance by region, of course. But I would say just to reiterate I think a couple of points we made, as Jon just summarized with respect to the Asia/Pac region, we do see some countervailing forces there that we think will likely continue through the second quarter. So we do expect to see progress in the second quarter, compared to prior year, greater than we delivered in the first quarter. We expect to see kind of the conditions out of the system more by the end of '08. With respect to Europe, let's split the UK and continental Europe. The story on the UK is kind of the same as Australia. The team obviously had a rough quarter. It's been very focused on improving that performance going into the second quarter. Given that some of the hits, so to speak, that we took in the banking sector were effective in the first quarter. It's hard to predict that they would all be out of the system by the end of the second quarter. But I do think what we will see there as well is progress against prior year, compared to what was delivered in Q1. With respect to continental Europe. Continental Europe has done good job in terms of, across the 13 or 14 countries of continental Europe, each one of them improving profitability on a relatively steady basis. Jon's just mentioned some of the governmental changes in Belgium that could affect us and frankly, placements, inside the financial sector is a fair degree of our business in continental Europe. So we would be hard pressed to say that's a straight up rocket. But I do expect to see them at least maintaining some reasonable progress along the lines of what we've seen in the past. So that's kind of how we see the world at the present moment. With respect to adjusted EBITDA, as you can see, there's a whole variety of factors including management and corporate expense. So all I can tell you is that for us to deliver earnings progress in '08 compared to '07 we would like to see each quarter making progress. Beyond that, it would be probably not too smart of me to try to do it by region for you. But conceptually again, as they make progress in their revenue and gross margin, I would expect to see some progress as well in EBITDA, because we saw all the regions trying to balance their expenses to offset their gross margin declines. They will continue to do that.

[Jeff Silber:]

Okay. That's fair. But just to follow-up on the adjusted EBITDA line. If I look from 1Q '08 to 2Q '08, you're looking for a pretty sizable ramp up. Will it be more pronounced in one region as opposed to the others?

[Jon Chait:]

Well, we have a normal seasonal ramp up, Jeff. So I think we would certainly see that trend continuing. I think, just as in the first quarter year-on-year comparison, we had a pretty good comparison in the US North American market. And although, we had a great quarter in legal, we still see that as a year-on-year comparison. In the second quarter, we would see that continuing.

[Jeff Silber:]

Okay. That's fair. On the corporate expense line, should this be roughly the rate we'll be looking at either in terms of dollars or percentage of revenues?

[Mary Jane Raymond:]

I think, roughly generally across the year we are contemplating some work that could give us an increase in the expense in the second quarter. But generally speaking, we've been pretty focused on trying to take the corporate expense down. I think roughly looking at it at $6 million across the year to $6.2 or $6.3 million is about roughly where we want to be.

[Jeff Silber:]

Okay. Great. Jon, I think in your prepared remarks, you talked a little bit about the RPO business, a couple of clients taking work back. Can you give us more color in terms of the size of the business what your strategy is, and how you think that business might do in an economic slowdown?

[Jon Chait:]

Sure. I think Mary Jane actually made the comment. But let me talk a little bit about our strategy and then, Mary Jane maybe will choose to elaborate on the number. In North America, we have a small, but meaningful RPO business. We had two clients, and I am familiar with both of them. Off the top of my head, I think we did work for one of them for three years and one of them for four years. So these were very long-term RPO assignments. In both cases, the nature of the assignment was driven by the company's desire to hire a large number of people during a relatively, I don't know if you call a short period of time, but a large number of people. So for example, one client we hired, let's say 400 people a year for three to four years, and the other client about 300 people a year, for three to four years. Many of the people are in sales or front facing, customer facing positions. This is a business where we create a separate business model, basically for each client, and it depends on the exact nature of the service that the client desires. One other client was a solely North American client, and the other client was part of a global contract. So while we did business in North America with that client, we did business in a large number of other countries, I want to say something like ten. It's a business that we feel very strongly fits Hudson. We do RPO business throughout the world. We don't have that many global clients. We're pretty selective about the kinds of situations that we play in. But we think that as a business that has more than 50% of our gross margin attributable to permanent recruitment, we can offer to clients either at the North American level or the global level, a very specialized service in permanent recruitment, and a footprint that very few of our competitors can match. So we are enthused about the business. The difficulty that we have in the North American market is it's a relatively small business. The termination or the cessation of a contract has a relatively big impact on this one line of our financial statements. We have a couple of good opportunities in the pipeline. We've had a couple that have also hit in the last couple of quarters. They simply weren't of the same magnitude. But one of the interesting things that we think when we look at it from an economic standpoint and I know, Jeff, that you are particularly fond of looking at the economic analysis, is that we are continuing to see companies come to us looking for 300, 400, 500, 1,000 people, frequently as I say in customer facing roles. Often times we don't bid on those assignments because, we have a very strict business model about when we bid and when we don't bid. And sometimes of course, we bid and we are not successful, because we have a strict business model and pricing. But I think looking at it as an economic indicator. I think given what you read in the newspaper, it's somewhat surprising that the order inflow in this business continues to be rather strong. So I think from an economic standpoint we find it pretty comforting and we'd like to land a couple of these out of our pipeline that would certainly make our numbers look better in the next couple of quarters.

[Jeff Silber:]

Okay. That's helpful, I appreciate it. Just a couple of quick numbers questions and I will let somebody else jump on. What was stock-based compensation in the quarter?

[Jon Chait:]

Stock-based compensation, give us one minute while we look up on the market.

[Jeff Silber:]

No problem.

[Jon Chait:]

We'll have it in a minute.

[Mary Jane Raymond:]

Otherwise, known as very good analyst here, so that's $600,000.

[Jeff Silber:]

I am sorry?

[Mary Jane Raymond:]

$600,000.

[Jeff Silber:]

Great. And then, I know taxes are always difficult to forecast. But roughly what should we be looking for in the second quarter?

[Mary Jane Raymond:]

That's a good question. Let me just take a quick look at that. Obviously, one of the things to just remind everybody about, with respect to the taxes on the first quarter, is that given that, when we talk about Q1 being small. It is particularly small in North America where we're not a taxpayer. So that accelerates the impact on the rate compared to the rest of the world. But roughly speaking I would say that you should see taxes about the same range as prior year.

[Jeff Silber:]

Same in terms of dollars -- effective tax rate?

[Mary Jane Raymond:]

Sorry, roughly about $4.344.

[Jeff Silber:]

Okay. Great. Thanks so much.

[Operator:]

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

[Mark Marcon:]

Good morning. I was wondering if you could talk a little bit more about the restructuring in North America, given the sale of the reengineering business and how you expect that to progress? And with PeopleSoft, could you also give us an update there, in terms of if everything is completely optimized? And then Jon, if you could also talk a little bit about the leadership in North America and how you're looking at that?

[Jon Chait:]

Sure. I mean while Mary Jane talks about, I will leave the numbers to Mary Jane. And just to explain again, remind all of the investors, we sold our engineering business in North America, which accounted for approximately what percent of revenues?

[Mary Jane Raymond:]

A third.

[Jon Chait:]

A third of its revenues. So like everybody else, we turned around and we looked at our infrastructure, and had a goal of reducing infrastructure, really at least, enough to compensate for the fact, that we just eliminated a third of revenues. So what Mary Jane said in her remarks, which I would just say you should underscore in your mind, was that this was an action where the action plan was completed in the first quarter. Now for accounting purposes, not all the actions will be in the numbers in the first quarter, because not all the people have left the Company. But we've actually completed the restructuring, so everybody knows what's going to happen. With that, I will just let Mary Jane comment on how the numbers flowed through.

[Mary Jane Raymond:]

Yes. Just to give you a few points on kind of what we did. First of all, we had roughly a third of the revenues sold, and we also had, I'd just say, roughly probably half the contracting base, so right at half are contract employees. What that drove from a restructuring program, number one was, as you may or may not know they were actually on a different system, they were still on the Oracle system. We're able to transfer that with the business and dismantle the support having to do with that. Second of all, such a large business of that size, such a high volume of contractors, also in seasonal peaks, led to a relatively large amount of support, both from a financial reporting point of view, as well as a payroll point of view. We streamlined all of those operations as well. With respect then to stepping back and saying, okay, so now that we don't have a third of the business, we need to look at the whole overhead structure. We did that with respect to all the aspects of support services whether that be marketing, other aspects of HR, et cetera. We also looked at the support that was in the front office to streamline between the two. So that set of actions then gave rise to our exiting four properties in the first quarter and secondly, our reduction in heads of, roughly between 70 and 100 people. Some of them will roll off in the second quarter because obviously, transitions, for example, in IT need to be done pretty carefully. But everybody has worked, not only very collaboratively about this, but even the people transitioning have behaved just in an exemplary fashion. We recorded 1.6 in the first quarter and as I said, we should have roughly about somewhere between $500,000 and $600,000 as we have the people finally roll-off towards the end of May. As our restructuring goes, I think it looks very broad-based. I think it did exactly what we needed to do with the sale of $125 million of revenue, and I think that helps us feel very good about the profitability prospects for North America going forward. With respect to your question about PeopleSoft and is it now all optimized. I am looking forward Mark, to the day that everything is all done. With respect to the general operations of the system, the thing we spent four or five quarters with the actual people from PeopleSoft helping us to do. That's in place, working well. Just from a financial point of view, North America has the best reporting track record of every region around the world. I think we will continue, not necessarily with an enormous amount of money, to improve our management reporting and various things like that. But in terms of heavy lifting on the system, I think that is now largely done in so far as we might expect large expenses coming through. That's the story on reengineering on PeopleSoft. Do you want to do leadership?

[Jon Chait:]

Yes. Commenting on the leadership, Mark, well first of all, Mark, I think the temporary Chief Executive of North America had a good quarter. So he's resting on his laurels. Seriously, we are continuing the process of looking for a permanent Chief Executive and we are right in the midst of the process. We are at that point in the process now where it is beginning to accelerate. We are interviewing more people. And hopefully we will reach a decision point in an appropriate amount of time. And so if that sounds like I am being careful not to put a deadline on this, then yes, that's true. I am being careful not to put a deadline on it.

[Mark Marcon:]

Are internal candidates also still being considered?

[Jon Chait:]

We always consider internal candidates, but we are interviewing a number of outside candidates. As I think I mentioned on the last call, we have hired a executive search firm to assist us in that.

[Mark Marcon:]

Okay. And then can you just to put a little more granularity with regards to the expense reductions. Relative to the first quarter expenses that we can see, how much more at the same revenue base, obviously, it varies depending on where the revenue is. But at this revenue base that you achieved in the first quarter, what would your expenses come down to once everything is complete?

[Jon Chait:]

Are you talking about North America?

[Mark Marcon:]

Just in North America.

[Mary Jane Raymond:]

Mark, your question is for the year, right, how much of the expenses come down?

[Mark Marcon:]

Yes.

[Mary Jane Raymond:]

Okay. So our expectation is that the expenses will be down somewhere between $4 and $5 million.

[Mark Marcon:]

And you will see that by?

[Mary Jane Raymond:]

Well, the annualized and that's an annualized number.

[Mark Marcon:]

Sure.

[Mary Jane Raymond:]

My expectation is that we'll probably see a fairly good chunk of that in this year, because we actioned the program in Q1. I don't know that it's just two-thirds. We had a little bit in Q1, call it $3.5 to $4 million we should see realized in this year.

[Mark Marcon:]

You had about two-thirds you achieved two-thirds of that objective in Q1?

[Mary Jane Raymond:]

No. We expect to see, just to make sure I am answering your question, $4 million to $5 million as an annualized number.

[Mark Marcon:]

Got it.

[Mary Jane Raymond:]

Okay. Because we launched the program in Q1, I think we will see a fair chunk of that in this year.

[Mark Marcon:]

Got that.

[Mary Jane Raymond:]

And that, I think should be somewhere between $3.5 and $4 million in this year. So that means, we had a little bit in Q1, which was about $0.5 million dollars, say roughly.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

Does that help?

[Mark Marcon:]

That does help. Okay. And then, with regards to the revenue guidance for this coming quarter, if I'm hearing you correctly, you are basically saying North America is going to come down sequentially by roughly $10 million, because of the unusual bump that you have in the legal business which then goes back to a more normal rate. And so where would you expect to see the big sequential bump in the rest of the business? Would it be the normal pattern that you see in Asia/Pac? Can you get that despite what's going on with the Australian government? Could you get a bump in the Europe, despite what's happening with the UK, I'm just trying to understand where you would expect to see a sequential increase?

[Mary Jane Raymond:]

Right. Well, first of all, with respect to just take Europe. I think as I mentioned, I think we could still have challenges in the UK but I do think that we would see some uptick in the second quarter in continental Europe for the reason that Jon gave.

[Mark Marcon:]

Yes.

[Mary Jane Raymond:]

The pattern of Europe, as you know, was Q1 and Q3 typically perform the same, and historically Q2 and Q4 have performed the same, with Q2, Q4 overtime getting a little stronger. So that's part of our sequential basis. We would naturally see that on the trends. The same thing should be true in Australia.

[Mark Marcon:]

Would that make up for what's happening in the UK?

[Mary Jane Raymond:]

Well on a sequential basis, we still could see the UK coming up, just sequentially. It may...

[Mark Marcon:]

Can you, I mean are you seeing improvements on a month-to-month basis in the UK?

[Mary Jane Raymond:]

Hang on a second. Compared to prior year in the second quarter, we are not necessarily expecting the UK to be above prior year in the second quarter. However, I do think it will come up from the first quarter. So given that we were fairly far below Q1, we are expecting a little bit of an increase there, and we are expecting some in continental Europe. So that's the answer on Europe.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

With respect to Australia, New Zealand, they also have a bit of a sequential impact between Q1 and Q2, meaning Q2 is higher. And second of all, in Asia proper, the four countries of Asia, while certainly not our biggest region by far absolutely, they are up against a tough comp or a very weak comp in Q2 last year, as you may recall. So again not a gigantic rise in the number, but a fairly one we can certainly see, simply because the comp was so low last year. That's kind of how we see the quarter playing out.

[Mark Marcon:]

Okay. Great, that was very helpful. And then can you just tell us what you are using for the EBITDA base for a year ago?

[Mary Jane Raymond:]

We are using the EBITDA base for year ago with all of the disc ops out, so as a number goes, we're using 12.2, adjusted EBITDA.

[Mark Marcon:]

Right, and for the full year you are using 41.4?

[Mary Jane Raymond:]

Hang on one second. Yes.

[Mark Marcon:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from the line of Mike Carney with Coker & Palmer.

[Jon Chait:]

Mike.

[Mary Jane Raymond:]

Hey, Mike. How are you?

[Mike Carney:]

Good, good. I had some questions, I forgot them. Okay. No, I got them here. All right. On the legal business, Jon, I don't think you had mentioned this, but this isn't related to the credit crisis, this is past litigation issues, right?

[Jon Chait:]

Yes. Cases that are not currently in the news, I guess.

[Mike Carney:]

But going forward, have you seen any increase in business, related to the credit crisis litigation from the document review side or any project side?

[Jon Chait:]

I don't think, not close enough to know absolutely, but I don't think we have. We have been anticipating it. One of the things is that I think in our business and we have been anticipating as we're wondering why we are not seeing it. I think one of the things with our business is there is obviously, a process in litigation. We have to get to a certain stage where the issues get defined and the scope of discovery gets defined, and then we get hired. And so we are not -- the nature of our business is that we don't have that much visibility until the cases reach that certain point, and the various attorneys and the judge agrees on the scope of discovery.

[Mike Carney:]

Yes.

[Jon Chait:]

Even companies that know litigation is pending can't kind of get started until they know what the dates are, for example, that are relevant, that the court will see as relevant. And then, there is usually some technological work that's done first to agree on the scope of the documentation that's going to be reviewed.

[Mike Carney:]

The temporary CEO of North America is a lawyer. Does he help sell or anything?

[Jon Chait:]

Well, I try not to kill too many deals. But once in a while, they call on me to actually talk to customers. But some people worry that I would kill the deal. So they don't want me, they are afraid I would increase the price.

[Mike Carney:]

Okay. And then also in financial solutions, that's it appears that the top line there has been improving. And so obviously, you took out a lot of costs last year. Do you see that continuing to improve this year and going forward? And then also is that one of the drivers of the -- is that part of the driver of the EBITDA increases in the U.S yet?

[Jon Chait:]

Well, first of all, we had a good quarter certainly in financial solutions. We also, like as with legal we have a project business. The difficulty is on relatively small basis projects, come on and go off, we have lumpy revenue top line. You are quite right we did eliminate not only some people, but some offices from a year ago. In some ways, that's an impact on the comparison, even in the second quarter. The other thing about the financial solutions business, I think as you look at our competitors as well, we are all kind of suffering from the same thing, which is a slowdown in the growth of the business post SOX. In an economy while, as you heard me say, I personally don't think we are in a recession, but we are in a slow economy. I think one of the dynamics of that is as business flows off it's harder to add business because there isn't so much around. And business slows off because projects have come to an end. I think also in a slow economy, chief financial officers want to set good examples. So they are careful about their own expenses, and ours is absolutely no exception. So they are careful about the amount of spending that they are doing, and they are driving by hiring outsiders. I think as we look out at Q2, I would be cautious about the volatility in financial solutions on a longer-term basis. I think this is a great business to be in. And I think we have a great team, and we will be successful. But I would just be cautious about the volatility in Q2.

[Mike Carney:]

And what about IT going forward, I mean, there is still declines year-over-year?

[Jon Chait:]

Yes.

[Mike Carney:]

But there's been some volatility there, too. I mean is it in its project base, so any thoughts?

[Jon Chait:]

Well oddly enough, our IT business to some extent, Mary Jane has a wonderful phrase, the tyranny of small numbers. Looking at it sequentially, our IT business has been very steady through the year. We simply did not see a dramatic fall off in March that a number of our competitors reported. Maybe, we had our fall off a year ago. So that's why we didn't have a fall off in March. I think we've had a steady IT business and we are not seeing major shifts on a sequential basis, major shifts in the top line in our IT business. Again, we are pretty optimistic about that business in the long-term. We are increasingly focused on improving our specialization, and we feel good about our leadership. Again, we are in a slowing market, so there is not as much business around. But we feel we are pretty well-positioned.

[Mike Carney:]

And one other thing, I don't think you mentioned contingent perm, was that weaker than the retained?

[Jon Chait:]

It was weaker than retained in the quarter.

[Mike Carney:]

Are you seeing the same good seasonal trends in all the perm businesses that you were talking about or is it just one?

[Jon Chait:]

As a whole, the numbers I gave you are as a whole. I don't remember actually the contingent perm trend by itself. Also, we've done a number of reorganizations with the contingent perms. This is one area where I'm not sure our year-on-year data is all that accurate. It was weaker than our retained business in the quarter. I don't particularly -- because we are so specialized in contingent perm. For example, while we had a strong business in legal and contract, we had a relatively weak quarter in legal and perm. I don't particularly ascribe that to an economic trend. I think it just falls in the category of volatility within the business. A lot of our perm business relates to paralegals. So I don't think it's necessarily driven by law firm permanent hiring. I think it just falls into the category of we didn't have a great quarter in that business.

[Mike Carney:]

Okay. Thanks a lot.

[Jon Chait:]

I think we've hit the ten o'clock hour. So operator, we are going to turn over to Mr. Kirby for some closing comments. But any of you who do have questions, David will be around today. Mary Jane and I have an outside commitment for the day. So Mary Jane, although she is prone to return calls from all sorts of interesting places, won't be available to return calls today. I think she will be available to return calls tomorrow.

[Mary Jane Raymond:]

But I will still try.

[Jon Chait:]

David will be around all day. We don't want you to think just because Mary Jane doesn't call you back, that there is some looming catastrophe. But with that, David, I will turn over to you.

[David Kirby:]

Thank you all for joining the Hudson Highland Group first quarter conference call today. Our call has been recorded, and will be available later today by calling 1-800-642-1687, followed by the passcode 43059918. For calls outside the U.S, please dial 1-706-645-9291, followed by the same passcode. The archived call will be available for the next seven days. Today's webcast will also be available on the investor sections of our website Hudson.com. Thank you and have a great day.