Hudson Global, Inc.
Q3 2008 Earnings Call Transcript

Published: 12 Nov 2008

[Operator:]

Good morning. My name is Adriane and I will be your conference operator today. At this time, I would like to welcome everyone to the Hudson Highland Group third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Kirby, you may begin your conference.

[David Kirby:]

Thank you, Adriane, and good morning everyone. Welcome to the Hudson Highland Group conference call for the third quarter of 2008. Our call this morning will be led by Chairman and Chief Executive Officer, Jon Chait, and Executive Vice President and Chief Financial Officer, Mary Jane Raymond. At this time, I will read the Safe Harbor Statement. Please be advised that except for historical information, the statements made during the presentation constitute forward-looking statements under applicable securities 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 analysts' 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, and thanks to all of you that are participating on the call for joining us this morning. Any discussion of the third quarter of 2008 must start with the global economic environment. The world is grappling with two separate but increasingly related crises, the financial crisis and the spreading global economic slowdown. The severity of these events has affected the confidence of business leaders around the world in terms of their perception of future business conditions. During the third quarter the economic slowdown that had been evident in the United States for us some months spread in an accelerating fashion to many other parts of the world. Much of Europe is facing contraction in the second half of 2008 or in 2009. The rate of growth is slowing across Asia Pacific with the large developed economies of Japan, Australia, Zealand and Singapore either contracting or facing extremely low growth rates. And the emerging markets facing slower growth compounded by weakening currencies. What is the impact on Hudson of these events? With 55% of our gross margin attributable to permanent recruitment Hudson is heavily exposed to economic cycles in all of our major markets. In periods of contraction employers frequently reduce their labor force which is negative for recruitment and therefore negative for Hudson. But even in the absence of economic contraction slow growth and uncertainty negatively affect hiring trends. Employers uncertain of the future tend not to increase the workforce or even fill vacant arising from attrition, and of course, attrition declines in periods of uncertainty. Moreover employment growth historically has lagged the economic cycle for the same reason. In the early stages of recoveries employers were uncertain of the sustainability of the recovery and are reluctant to increase permanent hiring. In our business perception quickly becomes reality. Temporary contracting accounts for 35% of our gross margins and temporary contracting reacts differently to economic cycles. Even in periods of uncertainty employers facing temporary labor demand requirements tend to hire contractors since the employer retains flexibility to quickly reduce contractor levels at any time without the expense of severance. However in the contracting economy employers tend to eliminate nonessential projects resulting in less contracting opportunities. As the recovery takes hold employers tend to use contractors in the first stage due to the uncertainty of the durability of the recovery. In a downturn essential projects will be continued, however, employers tend to attempt to reduce margins or to hire contractors directly. From a global perspective, the course of recessions or contractions is seldom uniform. In all recessions there are sectors of the economy that tend to be more stable or even grow. Dislike investors, staffing companies look for economic niches that offer greater opportunity despite the downturn. Moreover market center and exit recessions at different times and at different rates. The U.S. economy will benefit from the unprecedented liquidity pumped into the financial system by the government in forms of direct investment lending and guarantee programs and open market operations. With two-thirds of U.S. GDP attributable to consumer spending the health of the consumer is vital for healthy U.S. economy. We believe that declining fuel costs, lower interest rates, and declining commodity prices will provide a stimulus to consumers far beyond the direct government stimulus programs. However, it is difficult for us or any one to gauge the depth and longevity of the scars caused by the financial crisis. Some commentators think that the recovery will be stretched to a near as a result of the financial crisis. As a prudent business matter we intend to plan for a longer rather than shorter period of lagging economic performance. A healthy U.S. economy will be critical for the global recovery. We took actions to reduce our expense base in the first quarter of 2008. We continue the expense reduction actions through the third quarter. As you can see from the financial results reported for the third quarter on a gross margin decline of slightly over $17 million in constant currency, SG&A declined just under $13 million in constant currency. We continue to have flexibility to reduce our expense base to reflect declining demand. While we express concern about the spreading economic slowdown at this time last year we continue to make prudent investments in areas where we anticipate future growth. We opened offices in Dubai and Beijing and we expect that these investments will be successful for the company in the future. We have also invested in additional headcount in certain of the fast growing Asian markets and we have made an acquisition in China in 2007, which has performed very well. The Asian economies are rapidly becoming important to our industry as they are too many others and we believe we are strongly positioned in the developed and developing Asian markets. We’re often asked by investors how bad can it get. Of course, we have to acknowledge that we are living through a period without historic precedence. In our lifetimes there has never been a systemic risk to the foundation of the global financial system. But we can point to the two most recent recessions in the early 90s and in the 2001 to 2003 period. In most cases earnings for most of the industry fell to break even or loss. Obviously, it is not that simple. There are many differences between then and now. The causes of the current economic challenges are fundamentally different of course. The industry is also fundamentally different. The industry is more mature, client utilization patterns are different. There continues to be a shortage of highly qualified candidates and the world has advanced in terms of technology, communications, and labor law liberalizations. Still breakeven or loss could be a reasonable approximation of the impact of this severe downturn. Our geographic diversification and our strong specialized position in many markets have cushioned the impact of this budding economic slowdown. Despite the downturn, we believe we have the liquidity and capital resources not only to weather the downturn but also to take advantage of any opportunities to enhance or build our leadership position. With that I will now turn over to Mary Jane Raymond, our executive vice president and CFO, to review the financial results in the quarter in detail.

[Mary Jane Raymond:]

Thanks, Jon. Good morning. As a reminder we have posted some slights to accompany our marks on our web site Hudson.com. I will periodically refer to them as we go through our comments today. Jon just went over the economic conditions during the quarter and outlined the company’s position given this difficult environment. The economic environment externally did affect our Q3 results but I must say the actions of our local management teams on expense management helped a great deal to offset these effects. To describe this to you a little bit numerically North America, for example, more than offset its entire gross margin decline over $5 million in the quarter to advance their adjusted EBITDA above prior year. Year-to-date north America is delivering about $5 million a quarter in lesser costs compared to prior year on a restructuring charge of just under $2 million that was taken earlier in the year. Similarly in the UK, the UK offset 75% of their year-to-date gross margin decline with cost reductions given that their gross margin decline is about 20% year-to-date. That is up fairly but not for them to have cracked. For the third quarter, they offset 35% of their gross margin decline. The Asia-Pacific territory has turned their sites to the same sorts of activity (inaudible) especially with Singapore now in a recession and a short downturn that we saw in Australia in the middle of the third quarter. The focus of all of our leaders is to act in response to the conditions we are facing and the world is facing in a way that protects the health of the business and the needs of our clients. As Jon mentioned we have been talking about these sorts of softer conditions for about a year and we know they don’t go away very quickly. Having said that there are opportunities out there and our clients do need talent to navigate through these challenging times. The key goal of our company is to emerge from this period, this period of a declining economy in a way that allows us to take advantage of the upturn. To review with you a few of our specific numbers, the company’s snapshot on our slides on our web site is on slide three. For the total company in the third quarter, revenue declined 10% with gross margin declining about 11%. The overall gross margin percentage decreased to 42.3% from 43.1% last year. The gross margin mix shifted slightly in the quarter with perm declining faster than temporary contracting. Perm made up 55% of our gross margin in the quarter compared to 58% in the second quarter such as last quarter, and this mix for the company is detailed on slide 8. Looking at the results in constant currency, the revenue declined 11%, gross margin declined 13%, and the adjusted EBITDA declined 42%. The adjusted EBITDA margin for the quarter was 2.2% down from 3.5% in the same period last year. That said the adjusted EBITDA margins by region in the quarter were 6.8 in Asia Pacific, 3.3 in Europe, and 2.4 in the Americas. Corporate expenses at the adjusted EBITDA level were $6 million down from $6.7 million a year ago and down from $9.2 million last quarter. It is fair to point out to you that given the results we saw in the third quarter as well as the outlook for the rest of the year we did lower the bonus approval for corporate during the third quarter. Year-to-date our consolidated adjusted EBITDA margin was 2.7% at the end of Q3, down from 3.1% about a year ago. The regional breakdown year-to-date of adjusted EBITDA is shown on slide 11, which shows again year-to-date Asia Pacific at 6.5, Europe at 5.8, and the Americas at 2.1. Some of you have seen this chart from us before and we’re certainly happy to see North America in solid positive territory. From a currency perspective, on a year-on-year basis, changes in the currency helped our reported results by about $3 million in revenue and gross margins with not very much affect at all on the adjusted EBITDA. However, as many of you know, the most significant currency movement that we actually saw in our company was during the third quarter. When we set our guidance we were doing it at what was more or less the prevailing rates at the end of second quarter. In fact the results of currency during Q3 had a $7.2 million effect on our reported revenue and a $1.1 million affect on the adjusted EBITDA. Since the end of the third quarter declining trends in currency at least as they affect us, our reported results have continued with the dollar strengthening and I will address that currency impact and its effect on Q4 in a few minutes. Let me point out a few things to you with respect to the regional results and these are summarized on our slides five to seven. Hudson Americas was down 12% in revenue and 22% in gross margin in the third quarter. The legal practice group was up about 9% but IT&T, financial solutions, and perm were all down. About 20% of the gross margin decline was from one client that took a large outsourcing project in-house last year. We mentioned this last quarter and our action for that client finished during the third quarter of last year. Despite the softer top line results, the realignment of the cost structure has paid off for Hudson North America. Their adjusted EBITDA from a year ago has increased to 1.6 here in the third quarter compared to 1.4 last year. The UK continued to deliver relatively stable results despite probably in our company the challenging conditions we are facing in the various geographies. They did a very good job as I mentioned managing their expenses to navigate themselves from this current period. The slowness in the banking sector which we talked about last quarter gave way of weakness across nearly all of our practices particularly in London. This coupled with still candidate reluctance to move contributed to a 23% decline in the revenue and a 31% decline in the gross margin. This rate during the third quarter accelerated from the first half of the year where we saw about a 15% decline for the first half in the gross margin. At the European level, the UK decline was partially offset by constant currency growth in continental Europe where revenue was up 12%, gross margin was up 7%. With that growth led by France and the Netherlands. In Australian and New Zealand, their revenue was down 4% while gross margin was down 6%. In constant currency, the respective numbers are revenue down 7% and gross margin down 8%. The first wave of restructuring in this region during the quarter helped change the increasing expense trajectory we had been experiencing in prior quarters when the market was more buoyant. Even though the adjusted EBITDA declined in the quarter for Australia and New Zealand the adjusted EBITDA – for the whole of Asia-Pacific the adjusted EBITDA remains very solid at 6.8%. Asia, as Jon mentioned a little bit, showed some gross margin expansion in the quarter. On a reported basis revenue was up 4% and gross margin was up 6%. So, the gross margin advanced against the revenue and the same in constant currency while the revenue was down in constant currency 3%, the gross margin was only down 1%. We had top line growth in China and Japan. Hong Kong was relatively flat and Singapore as Jon mentioned was down slightly. Turning to the few other financial details in the quarter, the cash balance at the end of the quarter was $44 million; cash flow from operations was a use of cash of $1.4 million. About $2.5 million of the decline in the cash balance is due to currency. The cash flow for operations in some ways was roughly breakeven, down about $1 million because the largest driver of that actually was lesser net income. The net income was about $300,000 negative for the quarter. DSO was 55 days, one day higher than a year ago, and unchanged from last quarter. CapEx was $1.5 million, year-to-date it is $7.8 million, consistent with our (inaudible) recent history. The depreciation at $3.9 million is also consistent with recent trends. Our stock compensation in the quarter was $1 million compared to $1.5 million last year. The tax provision during the third quarter was $ 800,000 compared to $5.6 million last year. The company’s effective tax rate for the three months ended September 30, 2008, was over 100%, while the effective tax rate for the same period last year was 65.5%. Fundamentally the increase in the company’s effective tax rate is primarily driven by decreased income which reduces the pretax income and then a unfavorable mix of income in countries where we’re paying taxes, while a decrease in countries where we aren’t. While the income taxes will certainly reduce as well, we did have as many companies do periods related to FIN 48 charges and ongoing state and local taxes in states where we have taxable income. As a result the decrease in the income tax expense was not proportional to the increase – the decrease in the income itself. We have talk about talked about in several quarters trying to forecast the tax rate for the full year. I had mentioned last quarter that I was working to try and get it into the 50s. Obviously, we have had a fair change in the economical winds of most of the regions where we are operating. At this point I do think that the tax rate for the full year will be in the 90s actually for the same reasons I mentioned as affecting Q3. Our restructuring program incurred $2.9 million of expenses in the third quarter mostly related to severance and other reorganization in Asia-Pacific and Europe. We expect annualized savings on that of about 4 or 5. We have talked in the past about how in the non-US regions the yield on the restructuring charge tends to be a little bit less than what the U.S. tends to yield. Having said that our leaders in those regions are doing a very good job making sure that they’re making the types of actions that are both economically advantageous in the future and again the right things for the business. Our board recently raised the amount of our charge so that we can continue to take actions given the marketplace conditions that we are facing. We now expect our charge of which we spent $5.6 million year-to-date to be $8 million to $12 million for the total year. Turning to guidance, for the fourth quarter, we are expecting Q4 revenue of $205 million to $220 million compared to as reported $289 million a year ago. Our guidance of $205 million to $220 million is set at the exchange rates as of Monday, October 27. Before you slightly overreact to this $205 million to $220 million, this number is greatly affected by the exchange rate. If the (inaudible) number of $289 million was set at Monday’s rate, set it at October 27 rate that number would be $237 million. So we’re setting guidance on a similar basis of currency that is about 7% to 15% below prior year. With respect to EBITDA, we are expecting Q4 adjusted EBITDA of $2 million to $5 million compared to $13 million in Q4 of 2007. Here as well the adjusted EBITDA of $13 million a year ago would have been $9 million at the exchange rates prevailing on Monday, October 27. As I noted a moment ago we expect $2 million to $6 million of restructuring charges in the quarter though as of our definition of EBITDA is constructed these are excluded from the guidance. With respect to share repurchase, I will just comment on that because sometimes you ask. We do have $9 million left on our authorized amount. At the present moment obviously we spend a lot of time trying to balance our desire to buyback the (inaudible) of stock at certain times as well as to preserve our cash balance. I cannot tell you at the present time how much of the stock I think we would buy back in Q4. I can only tell you that we expect that we will buy some of it back. To give you a little flavor with respect to the regional operations for the fourth quarter. We expect challenging conditions more or less across the board in Q4 compared to our reported Q3 results, and then looking at Q4 expectations the top line will be under pressure in all of the region’s with Americas down slightly, Europe probably more than it was in Q3, and Asia Pac probably facing the most pressure because of the currency movements. We do have as Jon said very well pockets of strength in many of our regions that we expect to continue to work. But having said that overall we expect the conditions to be relatively dampened. In terms of adjusted EBITDA we expect stable results in Hudson Americas, some seasonal improvement in Europe, and the possible downside risk in Asia Pacific given the current market conditions. With that let me turn the call back to Jon for a few concluding remarks.

[Jon Chait:]

Thank you very much, Mary Jane. And in a moment, we will open the line to questions and answers. Before we do that, first of all, let me answer a question that many of you have asked in prior calls. And that is, what is the status of our search for a North American Chief Executive? I’m pleased to announce that we have reached an agreement with an individual to take on the role as North American CEO. It is subject to final contractual details but we expect to make an announcement by the end of next week. With that, operator, I will now open for questions and answers.

[Operator:]

(Operator instructions) There are no questions at this time. One moment sir, we do now have questions. Your first question comes from the line of Jeff Silber.

[Mary Jane Raymond:]

Hi, Jeff.

[Jeff Silber:]

Yes, I am sorry. Is the line open?

[Jon Chait:]

Yes.

[Jeff Silber:]

Okay, great. Glad I was able to get in. I had a question about some of the restructuring you have done and plan to continue to do. Are we at the point or are we getting near the point where you might be cutting muscle as opposed to what I will call excess. Is that something like you’re looking at?

[Jon Chait:]

I always struggle with those comments because I never met anybody who thought they were part of the fat. But I think the way I look at it Jeff, there are many things that probably are nice to have in a normalized environment. You can conclude that you need to have and as we enter into a potentially very severe environment, we will continue to take a very hard look at where the line is between nice to have and must absolutely have. So we think we still have flexibility in terms of our expense base, both in terms of not just in terms of severance but also in terms of just deferring things that we would otherwise do and things that all companies think about in terms of marketing activities or other things that in a severe downturn you are really forced to cut back on.

[Jeff Silber:]

Okay in the prepared comments. Actually I was looking at the press release that talked a little bit about your balance sheet and the liquidity remaining strong and I know you got that $75 million credit facility, have any of your banks approached you given what has gone on in the past couple of months in terms of any changes to that at all?

[Jon Chait:]

No. I will let Mary Jane maybe comment on our relationship with the banks. Just maybe give a little bit more color on where we see that situation.

[Jeff Silber:]

Great.

[Mary Jane Raymond:]

I would – they have not approached us per se since I have been here, our relationship with our bank very open very transparent and very active. There is an awful lot of things over time we have talked to them about, for example, the action we took earlier in this year to introduce stock buyback, which previously wasn’t allowed in our credit agreement. As a result of that we expect that we will continue to both manage our company and manage our relationship with the bank to allow them to be clear how the market tends to affect companies like ours and to be sure that we have a credit facility we can rely on. Go ahead.

[Jeff Silber:]

No I am sorry. If you could just remind me what the interest rate is on that credit facility?

[Mary Jane Raymond:]

It is (inaudible).

[Jeff Silber:]

Okay. And just a quick numbers question, do you have guidance for CapEx for the current quarter?

[Mary Jane Raymond:]

Well our CapEx we spent about $7 million. My sense is it’ll probably be roughly the same as Q3, maybe up to about $2.5 million something like that.

[Jon Chait:]

And I would say Jeff you know that I suppose it goes without saying but I will say that and that is that in an environment where we are anticipating a severe downturn we are looking very carefully at all CapEx and making like everybody is making judgments about what we have to do compared to what we like to do.

[Jeff Silber:]

Sure. One more question after I will let somebody else jump on. In terms of the share buyback when is the window open for you to start buying shares again?

[Jon Chait:]

I think we’ve – you know this is one of the things where we rather not comment too much but the general rules are three days after announcement of the press release and it goes up to the end of the second month of the quarter. That is the general window.

[Jeff Silber:]

Okay great. I’ll let somebody else jump on. Thanks so much.

[Mary Jane Raymond:]

Thank you.

[Operator:]

Your next question comes from the line of Seng Choon [ph].

[Seng Choon:]

Yes, I want to see if you could give us a little bit more color on the trends you saw in Asia Pacific and specifically Australia during the quarter. You mentioned a meaningful slowdown in the middle of the quarter and we can see the macro (inaudible) but curious if you can add more color on what you’re seeing in the field there?

[Jon Chait:]

Sure. You know Australia has been a two tier economy for some time with the natural resources portion of the economy really growing fundamentally grounded in demand from China. And then the economy in the urban areas particularly in New South Wales and Victoria, which has been growing much more slowly. So if you look at – if you divide up the headline Australia and GDP over the last several years you’ll find faster growth rates in the resource dominated states and much slower growth rates in New South Wales and Victoria. In the third quarter that has continued to slow in the – again in the urban areas New South Wales and Victoria and the new factor is lower demand in the resource dominated states which is filtering back into the economy overall. So that has been the challenge that we have been facing in Australia. We have got a couple of other points in our business that have been a little bit because weaker. Our talent management business which is a very strong business has actually struggled in the outplacement area. And you think in a declining economy you would see an increase in outplacement but we’re in a declining economy that s still has a skill shortage in Australia and in many of the developed companies of the world. So outplacement is actually little bit of a struggle and we’ve also had a little more of a challenging environment in public sector employment in Australia, as you know there is a governmental change which has now a bit – gone on a bit. You know it is probably a year and a half ago and our public sector business has simply not been as strong as it has historically been. So I would say in just taking those factors the biggest factors by far is the economic environment, kind of secondary factor would be our talent match with business our public sector business.

[Seng Choon:]

Okay and then on the restructuring charge can you comment on if this is permanently looking at individual expenses as you have been marketing in some perhaps discretionary stuff or will you reconsider any of the lines of business that you are in perhaps exiting some of the smaller ones.

[Jon Chait:]

I will let Mary talk about the numbers specifically because she knows it far better than I do but we really – what we think about expense reduction we think about it really probably in two categories. And one is not in restructuring just in generally in SG&A in actions that do not qualify for restructuring. And those actions we are doing things that are things that many companies do in terms of reducing marketing. We don’t reduce sales activity of course but in a climate where people are buying less it doesn’t make sense to continue marketing at the same rates and other kinds of discretionary things whether it is employee meetings of travels or other things that we either stop doing or defer. So there is a whole category of those time kinds of things that simply are reflected in SG&A. In the restructuring charge itself, I will just ask Mary Jane to comment about what are the actions that drove that number in the third quarter.

[Mary Jane Raymond:]

With respect to the third quarter the largest portion of it was severance. I would say that the way to think of this vis-a-vis the comments that Jon made is we have worked very hard in this company to move our business to be focused on specialized professional. We have made very good drives in a lot of those practices in many countries across the world but obviously from time to time particularly in a growing economy we will make investments in new practices to see if they work. Some of them do, some of them don’t. Those are some of the actions we took on which ones are performing and frankly which ones will be in demand in the current sort of economic climate and so we will sometimes. The charge did include the cessation of some business development efforts. But generally speaking when we just look at the level of business that is out there and who do we to need to run it and what sort of services are both in demand and should we provide. We’re really just continuing to focus on what do we really need to do right now so that we can continue to have the right amount of investment in the core practices of specialized professional without doing things that go into the category as Jon said is nice to have. To the best of my knowledge, we have not cut whole activities, practices, countries et cetera in this year and I think we have a fair amount of room to go we think in terms of flexibility on a cost basis without necessarily doing that.

[Jon Chait:]

I think one of the things that we are being careful about as we think about our business is where we want to be when the recovery arrives. So like every good manager I think what we try to do is we look at the very short term which looks and we have to take into account the probability but it is not 100% probability but it is a probability of a severe downturn. And on the other hand we also have to look ahead to make sure that we’re positioned to take advantage of the upturn. And as we look at the world we see opportunities that we believe will be enhanced in the recovery. I mentioned the growth in Asia as an example and obviously are opening in Dubai as another example where we want to be positioned to benefit. We don’t want to take the pain of the downturn and not get the benefit when the upturn comes around.

[Seng Choon:]

Okay and that is helpful. And then lastly I want to ask about the legal segment practice in the U.S. if it is still growing I would – curious if you are going to add any more color there about what you would expect in the current environment whether an increase in litigation activity could help that business continue to grow or if you see that slowing at the other practices also.

[Jon Chait:]

Well you are absolutely right. The legal grew and the North American legal grew in the third quarter. It is I think as we look out across the downturn we see this business is not particularly sensitive to the economic climate. You know America is a litigious society and a lot of the litigation that we deal with is kind of long-term litigation affecting industry issues. So I think over the course of the downturn we see the opportunity to continue to build the business. This is a lumpy business and we have, we haven’t had a quarter this year but we certainly have quarters where a business goes down because litigation settles, god forbid, somebody settles litigation and we lose contractors and we may not have a major piece of litigation right away a right around the contractors and we may not have another major piece of litigation right around the corner to replace it. So we always lags for investors. It is a lumpy business. This year we have been the beneficiary of a little bit of a spike up in the first quarter due to a particular piece of big business that finished up I think in the second quarter and beginning of the second quarter and that is the way this business is. But we think over the course of the downturn this will be a good business to be in and we have a good management team in place to compete very effectively in that sector.

[Seng Choon:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Ty Govatos.

[Ty Govatos:]

How are you?

[Mary Jane Raymond:]

Hi, Ty.

[Jon Chait:]

Hi, Ty.

[Ty Govatos:]

One technical question. What was the after-tax severance?

[Mary Jane Raymond:]

Let me just give a little thought for you and ask your second question now, I will –

[Ty Govatos:]

Is it fair to assume that most of the severance from here on will be offshore or aimed at offshore?

[Jon Chait:]

We rather not talk about severance particularly because our employees listen to the call. I think what we have tried to do first of all is we look carefully at performance and in this kind of environment it goes back to the nice to have, must have kind of paradigm. The major thing we do is accelerate performance reviews and in a normal environment we might go a number of months with somebody, especially somebody we think is making progress and in this kind of environment we might move more quickly. So I think I will say it is a fair comment that we did a very major restructuring effort in North America earlier in the year and we don’t anticipate any other major restructuring effort. We have also seen I think in Mary Jane’s prepared remarks we talked about that we made a pretty significant restructuring effort in this quarter, the third quarter in Asia Pac. So we think we’re in a pretty good shape in a number of areas that we have moved in but like anything else as things unfold, we always go back and we think everything we do.

[Ty Govatos:]

Fair. And I think I might have missed it in the presentation; did you give the revenue trends domestically for legal, IT, and finance for the third quarter?

[Jon Chait:]

I don’t think we mentioned that in the presentation. Let me check to see if we have.

[Mary Jane Raymond:]

What we talked about Ty was that legal for the third quarter was up 9% with all the others declining IT, financial, and perm resulting in North America being about 12% down in revenue.

[Ty Govatos:]

Would you like to add what the IT and finance are doing separately? I heard an intake of breath there?

[Mary Jane Raymond:]

I’m sending smoke signals across the table.

[Jon Chait:]

I think it is going to be in our 10-Q, which we will be filing in the next day or two.

[Ty Govatos:]

That is fine then. That is fine.

[Jon Chait:]

Rather than picking on there right now we’re referring to the 10-Q, because will give you a lots more detail in there.

[Ty Govatos:]

Okay.

[Jon Chait:]

Got to make sure that that is the best-selling item.

[Mary Jane Raymond:]

Ty with respect to your question about the after-tax restructuring, it is about $2 million.

[Ty Govatos:]

Okay. Thanks an awful lot. I appreciate it.

[Operator:]

Your next question is from the line of Mark Marcon.

[Mark Marcon:]

Hi, good morning.

[Jon Chait:]

Hi Mark.

[Mark Marcon:]

Just wondering if you could – could you talk a little bit about the specifics I know I’m not getting too granular but just from a geographic perspective where are new initiatives are going to be and if you could just for the benefit of everybody on the call you know, some people are more familiar with the story than others but just the restructuring charges that you have taken to date and the savings that have occurred to date by geography and then what is expected on a go forward basis so that we can at least think about the expense base to a greater extent, if that is possible.

[Jon Chait:]

We’ll do a little bit of math and be able to answer the question on the map first; I think that maybe I can take the some of the initiatives. Obviously in 2008 early 2008 as we previously announced we did a major initiative in North America to reduce our cost base. And I think we have I think the math is that we have reduced our expense base by – how much?

[Mary Jane Raymond:]

In North America year-to-date the expense base has been reduced over $10 million.

[Jon Chait:]

In our year-to-date –

[Mary Jane Raymond:]

Year-to-date on a charge of just under 2.

[Jon Chait:]

And our lend rate –

[Mark Marcon:]

On a charge of what?

[Mary Jane Raymond:]

Just under $2 million.

[Mark Marcon:]

Okay.

[Jon Chait:]

And our run rate is a little bit better than that. So because obviously as we went through the year early quarters of the year didn’t have as much expense reduction as the later quarters of the year. So that’s a pretty major initiative. And I think as we look at Asia Pac maybe Mary Jane.

[Mark Marcon:]

Sure.

[Mary Jane Raymond:]

With respect to the restructuring charge, the restructuring charge year-to-date is about 5.6. The total reduction in expenses is roughly about 14 to 15. In the beginning of the year as you may remember the charge, some of the actions went into effect during the first quarter, which means that in the first quarter proper we had some effect absolutely but not at the level that we are seeing it for example in the third. My expectation on the charge that we have is that we should see about a two times yield on that. So it is roughly $8 to $12 million we should be seeing at a minimum 15, which I think largely was already captured and as high as something like 24, 25 on an annualized run rate basis. Was that your question with respect to the charge once you start there [ph].

[Mark Marcon:]

Yes, I just wanted to and then with the Europe anything?

[Mary Jane Raymond:]

Okay. So obviously as we have all seen the new guys now the yield on our restructuring charge is considerable greater in the U.S. With respect to Europe their charge at the present moment is in round numbers about $1.6 million. So roughly under $2 million and their cost savings has been fairly considerable annual rate of about 5 to 8 on that. Their only just starting to begin to think about kind of how they will see the economy in continental Europe. So I can’t give you a good number on that. Generally our goal would be to try and have at least 1.5 yields in continental Europe.

[Mark Marcon:]

Okay so just to summarize and to make sure I got this right, so in North America so far to have taken charges of $2 million with savings – expected savings of $10 million. In Asia Pac you have taken charges of $5.6 million with expected savings of 14 to 15. Some of that went into effect in Q1, but the greater impact is – was certainly here in the third quarter. In Europe you have taken charges of $2 million with the savings expected to be in the $5 to $8 million range. Is that a correct reprisal of what has already taken place?

[Mary Jane Raymond:]

No, sorry. I think that was my fault Mark. The total charge for the total company is 5.6.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

The yield on the charge so far is 14. If I break it down by region, just roughly 2 million in the U.S. the charge with a yield of between 10 and 11.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

It is just under 2 million in Europe of which they’ve achieved about 5.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

And in Australia excuse me in the Asia Pacific region, which as just begun we don’t yet have such number of quarters to show but of the $2 million roughly taken so far my expectation is they should have a least $5 million yield on that.

[Mark Marcon:]

Okay. All right and then going – and now we’re taking the charge up. So what still has to come will be in North America, any additional charges you anticipate or is that been right sized?

[Jon Chait:]

I think at this point we’re not in a position to really itemize the charges by region. What we would say is that the yield on the remaining charge would be lower as Mary Jane said and so what is remaining there Jane.

[Mary Jane Raymond:]

So if the charges roughly $6 million taken right now our charge is sitting at 8 to 12. So it is anywhere from 2 to 6 left to go.

[Mark Marcon:]

Okay.

[Mary Jane Raymond:]

And my expectation is if we have almost a three times yield all in it’ll probably not exceed two all in on the original charge.

[Mark Marcon:]

Okay. And when would you expect that to go into effect.

[Mary Jane Raymond:]

Well just because we’re of course in the economic conditions behaving rapidly we would like to expect we would too – some of the actions that are important may have the possibility going into Q1 to be completed but we would hope to action the vast majority of what we’re thinking to do before year end.

[Mark Marcon:]

Okay and then Jon is it your expectation, I mean, thank you very much for laying out the macro environment, you know, at the beginning clearly things are extremely difficult for everybody, and you mentioned companies do go break even in the past or have gone break even in the past. Is it your expectation that with the changes that you are making your hope is to – in a tough environment still be break even?

[Jon Chait:]

Well you know, of course my hope and my aspiration is to be profitable. You know and think like it like anything markets is always a balance of – you take actions kind of assuming the worse but hope it is better than that. But I would certainly hope and expect that we would be able to breakeven even in a severe downside scenario.

[Mark Marcon:]

Okay. So in which it is seems like every indication which suggests we are in.

[Jon Chait:]

It would you know certainly the world is still with negativity at this point.

[Mark Marcon:]

Okay. Great. And then in terms of fashion you know, you do have you are going to get ten Hearn out from Highland Partners, what is – when you think about your cash balance and just balancing buyback versus just preserving some cash in this sort of environment. How should we think about that?

[Mary Jane Raymond:]

Well first of all that cash that would be due from Highland Partners would come next year. (inaudible).

[Mark Marcon:]

Right.

[Mary Jane Raymond:]

As I mentioned not meaning to give you a non-answer. I think that given we have seen some further decrements in client buying patterns through the third quarter (inaudible) at the present moment to think about or even target a certain number we would have in the share buyback. I think if you could see in the third quarter let us just say we were rather restrained in the share buyback. Really, I mean whatever number I gave you today would probably change by tomorrow. All I can tell us is we do watch the stock price. We have the share buyback program in our – allowed in our credit facility for a reason. And I would expect that we would buy some stock but I don’t think we would do it in a way that it would materially reduce the cash balance. I think we would have preference for keeping the cash.

[Mark Marcon:]

Okay. All right great thank you.

[Operator:]

Your final question comes from the line of Greg Eisen [ph].

[Greg Eisen:]

This is the last but not the least, thanks. Good morning. Regarding the buyback I’m trying to understand the limiting factors on how much you will buy back specifically I guess that two questions would be how low – are you comfortable with your corporate cash being given the downside risk to this economy. We don’t know where the bottom is. Or is it a function of really how much cash you have in your United States operation and you would have to repatriate cash to the United States in order to execute the buyback in the first place. Is that the issue?

[Jon Chait:]

Well, I would say that probably the overriding issue is simply a function of cash flow and cash requirements versus the opportunity to buy back stock. It is as we have tried to say we don’t have an easy answer, it is a balance. One other factor that we look at is our cash flow and our cash flow is seasonal. So in the first quarter of the year we will have cash requirement, the cash use. So as we think about buybacks that has an impact on us as well and that is really the main driver.

[Greg Eisen:]

I see. So it is – the swings to your cash level is based upon the quarterly cash flows seasonality.

[Jon Chait:]

That is right.

[Greg Eisen:]

And you need to allow for the dips in the cash flow.

[Jon Chait:]

Exactly.

[Greg Eisen:]

With a safety margin.

[Jon Chait:]

Right and we are going into a very uncertain environment. You know, in today’s world I think somebody asked us just look at the questions when we got on this call. Somebody asked us basically are your banks still going to be funding you. And they don’t mean it, they don’t mean it. The crazy world we’re in is they don’t mean it about us. They mean it about the bank. Our bank is Wells Fargo Foothill. So we think we’re in pretty good shape. Yes, so it is a crazy world we live in and we said – as I said before all that we can say is we try to balance them. We try to create a cushion. And I think everybody today is being in a world where today’s New York Times has an article about $62 billion that is stuck in a particular money market fund you know, everybody’s being very cautious about everything.

[Greg Eisen:]

I understand. Regarding the Highland Partners earn out that you said if you get it you are going to get it next year. Can you bracket a range in which you could reasonably expect to receive?

[Mary Jane Raymond:]

Sure. Just to maybe remind you how the Highland Partners earn out works. It is payable in two tranches. First was paid in April. The max that could have been received was 6 of which we received 3.4. The max in total that can be received is fifteen. So as we go into what would be potentially receivable in April of 2009 having received 3.4, the amount we could receive then is 11.6 because with a cap of 6 if it does not hit in the first year as well as the second. From – so that’s kind of how the math works on it.

[Greg Eisen:]

So anywhere between 0 and 11.6 is the ultimate range.

[Mary Jane Raymond:]

(inaudible) exactly I would begin to calculate on (inaudible) results, but that is the drill exactly.

[Greg Eisen:]

Okay. And obviously that is in next year but you said you received it in April, do you know when next year you would expect to come to a conclusion and receive whatever you owed?

[Mary Jane Raymond:]

It is the same time. So we would know prior to the end of March, how good [ph] their earnings would be. There is a protocol on that and then it is received some time in the just say roughly about the middle of April.

[Greg Eisen:]

So you would know by your first quarter ‘09 conference call you are scheduling what you would report on it?

[Mary Jane Raymond:]

That is a right. And I think if I recall correctly I think I did report that out in the conference call. So, fortunately the protocol matches for both of us so we tell you what’s happening.

[Greg Eisen:]

Okay. I see. And my last question is a kind of strange open ended question but throw it out at you anyway. I guess Jon you have been in this business long enough to I guess have memories of prior employment downturns. Theoretically in your mind how bad can the type of business you are in get given unemployment backing up a few hundred basis points from were it bottomed? You know is there a way of quantifying that for us is to what you saw in the industry from your perspective and the types of businesses that you’re in but why you’re not in those specific business units in the previous recession.

[Jon Chait:]

No, actually I wasn’t pretty much in the same business in both the last two major recessions and many others in between in smaller geographies. I would say the bottom line I would give you the answer, the conclusion first and then I will give you somewhat longer answer. I think as I said in my shareholder letter a reasonable approximation is to say break even to zero in a severe recession is certainly a possibility. The longer answer is that historically my thinking about this business has been that there is been a divorce between Wall Street and Main Street and it is not always – things that happen in the stock market do not always have an impact in kind of the so called real economy. The thing that is more disturbing about this particular downturn it that it is not just the stock market and first of all the stock market has a much broader spread in today’s world that it did 20 years ago because of the proliferation of 401 (k) accounts but the two things that have really made this downturn different and makes it difficult to analyze is the impact of the financial crisis. You know that is having a very direct impact on Main Street and because of the reluctance of banks to lend it is having a very direct impact on housing issues which is one of the most important factors in the wealth effect and how it affects consumer behavior. So it makes – I think it makes this recession particularly difficult to analyze. If you look back at the last – if you include this as a recession and you look at this period 2001 and 90, you would find 3 very different sets of environments. 90 was kind of a classical recession where we had a big run up and then we had a big blow off. And then things recovered and we gradually built up again and it was, you know, we were still highly manufacturing oriented side we are in. You know, in the 2001 to 2003 recession it was very much around the Internet. That had a very significant impact on our industry because it wiped out a number of our customers, just wiped them out. So that had a major impact on us even though if you look at the economic statistics it is not as deep as the 90 recession. Then you come to this one and the driver here is subprime mortgages. I mean who would have ever thought subprime mortgages would be a catalyst of unwinding a huge segment of the financial underpinnings of the global system. So I think it is all – that is the complex one which is the wrong way of saying there are lot of differences and I’m not sure how they all factor in but when you distill it all down I come back to my conclusion that I started with a reasonable approximation is to say with a severe downturn with unemployment going up a couple of percentage points, so from like 6 to 8 negative GDP for a couple of quarters, you know, that a approximation of breakeven is a rational way to look at how bad it could get. Remember that the first quarter in this industry not only for us but for everybody is a very weak quarter. And I would – my expectation in theory philosophy is that, weak quarter in a weak environment it would be very weak. I will be surprised to see losses all over the industry.

[Greg Eisen:]

Okay. That is the weak quarter of the weak industries.

[Jon Chait:]

Right, it is right.

[Greg Eisen:]

If we just time in the economy.

[Jon Chait:]

That is right. Exactly.

[Greg Eisen:]

Okay, I will accept that thank you very much.

[Jon Chait:]

Thank you all and thank you and we have come to the close of our hour and I will turn it to David for closing remarks.

[David Kirby:]

Thank you, Jon, and thank you every one for joining the Hudson Highland Group call for the third quarter. Today’s call has been recorded and will be available later today at the number 1-800-642-1687 followed by the passcode 67938698. For callers outside of the United States, please dial 1-706-645-9291 followed by the same passcode. The archived call will remain available for the next seven days. Today’s webcast will also be available on the Investors section of our web site, hudson.com. Thank you and have a good day.

[Operator:]

This concludes today’s conference. You may now disconnect.