Hudson Global Inc (HSON) 2011 Q1 法說會逐字稿

Good morning.

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

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

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

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

(Operator Instructions) Thank you.

I would now like to turn the call over to David Kirby, Director of Investor Relations.

Sir, you may begin.

Thank you, and good morning everyone.

Welcome to the Hudson Highland Group conference call for the first quarter of 2011.

Our call this morning will be led by me and Interim CEO and Chief Financial Officer, Mary Jane Raymond.

At this time, I will read the Safe Harbor statement.

Please be advised that except for historical information, the statements made during the presentation constitute forward-looking statements under applicable securities laws.

Such forward-looking statements involve certain risks and uncertainties, including statements regarding the Company's strategic direction, prospects and future results.

Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which we operate, risks associated with competition, seasonality and the other risks discussed in our filings made with the 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 future forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

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

They are posted on our website under Featured Documents.

With that, I will now turn the call over to Mary Jane Raymond.

Good morning.

Thanks for joining our call today.

The earnings slides for this call are posted on our website, hudson.com.

They primarily show Q1 2011 results compared with the prior year.

The quarter was characterized by strong revenue delivery growth amid a continuing set of economic and national crosscurrents.

Our revenue growth was 21% on a reported basis, even though few countries around the world, as a general matter, are talking about strong job creation outside of Asia.

The world and our Company also contended with a number of natural disasters in the first quarter that caused some slowing in regular business activity early in the quarter.

For our Company, every region posted revenue growth this quarter, as clients continue to turn to us for their strategic hiring.

We saw good contributions from all lines of business resulting in our strongest quarter in two years.

Amid this good performance, our teams contended with some of these world's challenges.

The flood in Queensland and the earthquake in Christchurch, New Zealand affected our earnings by about $500,000 all things considered and slower hiring early in the quarter from some of our larger multinational and financial institution clients in Asia moderated our growth in the Asia region.

All of these, however, are temporary events though and we're already seeing business nearly back to normal.

Asia ended the quarter, the first quarter, on a strong note and we're encouraged by their early April trends.

We are also very proud of our remarkable resilient teams in Brisbane and Christchurch who have their businesses back nearly onto the track they expected.

Our 21% reported revenue growth in the first quarter was 16% on a constant currency basis.

This was led again by perm at 32% growth, followed by temp contracting at 21%, the strongest temp growth we've seen in the recovery so far.

These growth rates are 26% and 16% in constant currency, owing to the strength of both the Australian and the Singaporean dollars.

Talent management grew 2% this quarter, flat in constant currency, a second quarter of positive movement with much of that coming from our Belgian operations.

This positive mix shift lifted the overall gross margin by 30 basis points.

EBITDA was within our guidance at $2.5 million, but lower than we would have liked.

Two of our drivers we've already mentioned, the business interruption in ANZ and very moderated client hiring in Asia early in the quarter.

The other element worth noting is the bonus expense, which we are accruing this year more evenly over the year than we did last year.

At this time last year, we were accruing the bonus only to an annual payout of about 50% because that was roughly our outlook at the time.

We expect the annual payout for this year to return closer to normal.

This last factor was contemplated in our guidance formulation and it's worth about $1 million.

The more even pattern of expense is one of the reasons that the leverage, the change in the gross margin realizing in the EBITDA improves later in the year.

The UK was our largest EBITDA contributor in the first quarter with continued strength in perm and accelerating growth in temporary contracting.

In Continental Europe, we saw strength in virtually every country gradually overcoming concerns regarding reduced government spending.

Our North America business continued to experience steady progress in legal and IT, and our businesses in both Australia and New Zealand, as well as in Asia remained strong EBITDA contributors in the quarter with their results largely driven by perm.

As the recovery progresses, our businesses are successfully capitalizing on the growth opportunities we see in each region and the additional capacity in the form of people that we've added is helping that.

We're seeing good contributions from our new people even though they're still dampening our earnings.

They're still in the process of ramping up at this point and based on their good start, we expect to see them as good contributors over the course of the year.

We're also beginning to see an upward shift in margins, even though, as a general matter, lower gross margins persisted for longer than we expected or for the better part of five quarters.

But if you take all these points together and you look at them in light of the variety of comments we've seen from our competitor companies, I think it's fair to conclude that the balance of the factors is actually trending upward.

The year is off to a good start and we're very positive about our outlook.

I'll turn it over now to David Kirby to provide some additional financial details.

Thank you, Mary Jane.

Strong top-line growth in the quarter drove our earnings as follows.

We had growth in both perm and temp, and flat performance or arrested declines in talent management.

This is our fifth consecutive quarter of accelerating revenue growth at 21% reported, 16% in constant currency compared with the first quarter of last year.

Permanent recruitment was again our fastest-growing line of business, with revenue growth of 32% in the quarter on a reported basis, 26% in constant currency.

As was true during 2010, perm revenue trends we are seeing are coming from every region.

In ANZ, we had 60% growth or 44% in constant currency; in the Americas 29% growth; in Europe 24% growth, 22% in constant currency; in Asia 13% growth, 7% in constant currency.

Turning to temporary contracting, we had growth that accelerated each of the past five quarters and reached 21% in Q1, 16% in constant currency, with again growth coming from every region where we have our measurable temp business.

Regional temp revenue growth was as follows.

In the UK 32% growth or 28% in constant currency; in ANZ 19% growth, 7% in constant currency; in the Americas 16%; in Continental Europe 3% growth, 4% in constant currency.

The impact of the temporary contracting revenue growth was moderated a bit by continuing pressure on the temp gross margin percentage.

Temp margins are down 40 basis points to 17.7% in the first quarter compared to last year.

Sequentially, this is up from last two quarters of 2010, which were at 17.4% and 17.3%.

So we're turning in the right direction for margins.

That total margin is made up of an Americas contribution at 19.6%, followed by Europe at 18.5% and ANZ at 15.1%.

SG&A expenses in the quarter were up 16% against prior year, 12% on a constant currency basis, against gross margin growth of 22%, 17% constant currency.

That spread leads to EBITDA leverage of 26% on a reported basis, slightly better at 30% on a constant currency basis.

The lower leverage this quarter is driven by higher compensation-related costs for additional staff, as well as a restoration of full bonus accrual compared with first quarter last year.

Head count overall is up 12% or 250 people from the first quarter of 2010, the vast majority of which are in sales roles.

Against gross margin growth of 22%, total compensation was up 20% and office and general expenses were up 3% in the quarter, all compared to Q1 last year.

Our tax provision in the first quarter was $750,000.

About half the tax was from taxpaying countries, while the rest was for withholding tax and FIN 48 true-ups.

For the year 2011, we expect the tax provision to be about $6 million based on our current outlook.

I'll now turn to cash and liquidity.

Our liquidity remains high at $71 million composed of $28 million in cash and $43 million in available borrowings at the end of the quarter, down about $2 million from the end of the year.

That said, we did have an increase in our borrowings in the quarter, up from $1.3 million at the end of the year to $11 million at the end of Q1.

The first quarter is always a higher cash-usage quarter, and we still expect to deliver positive cash flow from operations for the full-year 2011.

The main operating factors that increased our cash usage at the start of the year are first; bonus-related payments, the 2011 bonus payments paid at about 90% of target around the world and higher payroll taxes associated with compensation.

Secondly, our receivables increased by $15 million from year-end.

This is due to the revenue being more weighted to the second half of the quarter and slower-than-expected collections in our ANZ market in particular.

This resulted from a combination of factors, including some delays in billings on our part, slower payments from clients, and some impact from the flooding and earthquake in the region.

Our restructuring reserve continues to decline and is now just over $2 million.

Most of it is property-related and we expect this to pay out over the next few years.

Cash payments on restructuring were $600,000 in Q1 compared with $3.4 million a year ago.

CapEx in the first quarter was about $1 million.

Looking at the full year, we will continue to be disciplined in our CapEx spending and would expect to spend approximately $7 million for the year.

This is up slightly from our year-end expectation of $5 million to $6 million due to some opportunities to improve our property and equipment costs.

With that, I will now turn the call back to Mary Jane.

Thanks, David.

Looking at our second quarter guidance, Q2 is usually a seasonally strong quarter both for the recruiting industry and for our Company.

We expect the strong top-line trends that we've discussed today to continue in the second quarter and we currently don't see any changes in the recent trends that we've seen with respect to mix.

Given that, we expect revenue of $230 million to $240 million at the current exchange rates and EBITDA of $5 million to $8 million.

This guidance compares with revenue of $195 million in the second quarter of 2010 and EBITDA of $3.1 million.

Regionally in the second quarter, we expect the following directional trends.

Similar year-over-year growth in temp and perm, as we reported this quarter.

The revenue guidance implies growth of about 20%, ranging from $18 million to $23 million depending on the region against prior year.

Looking at the regions, our expectation is that Asia and the Americas will post higher growth than we reported in Q1, while the other regions will continue to post growth fairly similar to the first quarter.

While we expect to see some improvement in our temp gross margin over time, we are not banking on that for the second quarter, so we do expect to see some growth in talent management in the second quarter.

Consequently, our overall gross margin should rise slightly on this mix.

Regarding EBITDA, we expect to see notable improvements from every region compared to last second quarter.

We expect to see continued high leverage in North America and similar -- broadly speaking, similar leverage in Europe and ANZ, as we reported in the first quarter.

We remain confident in our directional outlook for 2011.

In the last call, we said that we believe the revenue growth would be in the mid to high teens, and that the EBITDA on this revenue growth would range between $28 million and $32 million against assuming our mix similar to 2010 and assuming that all regions continue to recover.

The outlook does depend on a few things like, recovering gross margins and the ability to drive a return on our investment in head count, while overcoming turnover.

But these things are within our grasp and they're very good things for us to be working on, so we will remain very focused on doing so in order to deliver this year.

On a final note, before we begin the Q&A, I just want to say that we're all happy throughout Hudson worldwide to have Manolo Marquez joining us as our new Chairman and CEO.

We expect his [work visa] to be finalized some time during the month of May and we look forward to the leadership and guidance that he'll bring us as we deliver this year.

With that, let us open the line for questions.

(Operator Instructions) Jeff Silber, BMO Capital Markets.

Thanks so much.

David, I think in your prepared remarks you talked about temp gross margin declining slightly in certain areas on a year-over-year basis.

I just was wondering if we can get a little bit of color on that and what the expectations are going forward in the temp gross margins?

Thanks.

Sure.

Let me at least break that down by region for you.

And then we'll give you a little more color.

In our slide deck posted on the website, hudson.com, page 15 we give you temp margins by region compared to the prior year.

I went through those on the call.

I won't repeat them again, but they're blending to 17.7%, down from 18.1% a year ago.

Americas is down a little over 100 basis points, Europe is up a little less than 100 basis points, and ANZ down a little less than 100 basis points.

In terms of by region, we've definitely seen a slight pickup in large projects in the US with some pressure on margins there.

That's probably true internationally as well in the UK and with some pressure in ANZ also.

I think part of what we're seeing on the temp gross margin is a little bit, at least for us a little bit part and parcel of this jobless recovery.

We see a broader variety of clients buying at this point five quarters into this recovery than we certainly saw, say, last or the fourth quarter of '09 and the first quarter of '10, but the fact remains that there is still a lot of pressure on the tem gross margin and we are finding people willing to do it at somewhat lower bill rates.

If you look across the competitive comments on this, that's not universally true among our competitors, I know that, and it's varying around the world.

But I would say we had projects in the third and fourth quarter that we accepted that we're still at lower rates, but continued into the first quarter.

As a general matter, that's a good thing allowing the revenue stream to be more steady and it's really kind of at the back end of the first quarter that we're seeing the rates start to go up.

That's true and legal in the US market and we're seeing some shift in the business as well in Europe.

So that was my comment about notwithstanding the margins beginning to come up, it's really a bit of a pesky problem that we are seeing in these temp gross margins persisting at a low level.

Having said that, as the quarter progressed in Q1, they're beginning to recover and that's what we are expecting to see as the year goes on.

Okay, great.

Mary Jane, you'd also mentioned a few times about slower hiring in Asia earlier in the quarter, though I know it's picking up.

Was there any specific reason for that?

Is it attributable to some of the natural disasters that you spoke of?

To some extent, it might be.

Though, of course, keep in mind in our Company we don't have an office in Japan, so we didn't have a direct Japanese impact.

But I'll tell you, the vast majority of our business in certainly China is worldwide multinationals, let's call them.

And my sense when we looked at the slower hiring there as well in the banks that we serve in the whole Asia market was that it was almost kind of like a taking stock.

They reported out a fairly good year, their hiring had ramped up.

We saw out-of-the-box hirings since third quarter of '09 in Asia and it was almost, I sometimes think people did a little bit what I did, which is okay, hang on, let's see where we are.

That obviously intersected Chinese New Year.

And having said that, it was less -- it was more of an impact than I expected it to be.

But I don't think it was any event per se, I just think it was more a pausing while people reported out their 2010 year.

I mean as a general matter, when we look at the March trend, just kind of directionally, the growth rates in every country in local currency that we operate in Asia were twice that of the quarter's average.

So that's what sort of causes me to think it was just really more of a pausing and we're happy to see that coming back in April as well continuing to be strong.

Okay, great.

A couple of quick numbers question, what was stock-based compensation cost in the quarter?

That is a good question.

It was probably about $0.25 million.

Okay.

And should that be the run rate going forward?

Well, I do think obviously, with the change in our CEO, his packages published, we will have his stock grant, which he well deserves.

Our Company uses the tranche-based method, which would record about 52% of the costs of any grant in the beginning of the year.

So I do expect that we'll probably see a spike for that probably in the neighborhood of about $0.50 million to $0.75 million for this year.

And then I think it will kind of go back to normal.

Okay, great.

And then also share count that we should use for the second quarter?

Probably not so materially different than what's out there for Q1.

Let us do a little bit of a calculation here.

Okay.

You can get back to me, I can follow-up offline.

Thanks so much.

Okay.

And I'll make one correction to actually your prior question, Jeff, stock-based comp, a little more than $500,000 or closer to $600,000 in the quarter rather than the $250,000.

Okay.

All right, great.

And then the same increase that Mary Jane had talked about going forward?

Yes, yes.

Okay.

Thanks so much.

Sure.

(Operator Instructions) Mark Marcon, R.

W.

Baird.

Hi, Mark.

Hi, good morning, Mary Jane and David.

Could you go through the Americas' EBITDA just in terms of the sequential trends?

Was the decline just purely driven by the way that you're changing their accruals or there is an increase in [pseudo] or is there anything else that was going on?

Well, I think the first thing as we look at the sequential trend from Q4, you mean, yes.

First and foremost, we had a project that I talked about that started in the third quarter that will probably anniversary here in the first quarter end is probably the better word.

That was a good project, but relatively of low margin.

It, I think, was strategically a smart thing for us to do in terms of clients that we were able to access with that project, but that did give us a dampening of the gross margin, the temp gross margin by approximately 200 basis points.

So that's the first thing with respect to how the gross margin is realizing off the revenue.

The second thing is that we do have the normal burden rates in the first quarter [that are] usually finished by the fourth quarter and in fact finished by the third, and that along with the fact that we would have a more normalized bonus accrual for North America here in the first quarter than we did in the fourth quarter has taken the composite compensation up about $600,000.

In the North America unit, notwithstanding their good progress last year to get to breakeven from a loss in '09, nonetheless did not hit their bonus threshold for the vast majority of the staff, and consequently it didn't really pay out in 2010.

We're expecting that to be different for 2011, as we get people back to bonus territory.

So the bonus accrual again is affecting them, as I said.

So that composite set of things, the burden rate plus the bonus is about a $600,000 effect.

And then with respect to the other expenses, they're kind of about in line.

So we get basically about $1 million change between the gross margin and the compensation.

Okay.

All right.

And are you investing in the Americas as well?

Are you adding head count?

What are you seeing in terms of those sorts of trends?

Well, I would say that with respect to the head count, we have been -- yes, well, I would describe as extremely modestly adding some head count.

I mean the head count is up about 9% on the sales head count.

We have expanded some of our heads in the legal business, which I think is a good thing because we're also beginning to see our legal business starting to have some roots outside the United States.

The US has the most experience in that type of a business, so that's a good investment.

And similarly, we saw IT begin to pick up about the middle of last year and we're adding there.

Not so much in financial solutions, of course, I still notwithstanding some of our competitors' excellent results in that area, in our more small and medium-sized businesses we're still not seeing quite a lot of activity there.

So is some head count, but 10-ish percent for us in North America is about 10 or 12 people.

Great.

And so as we look at the full year, how should we think about the Americas in terms of how that should trend in terms of EBITDA for the full year?

Sure.

Overall, I think we are expecting that North America will be able to post growth.

Let me just take a quick look here.

We saw 16% growth in the first quarter, as we noted.

We're expecting to see that go up.

I expect that to be in the 20s, kind of the mid to low 20s for kind of the balance of the year Qs 2, 3 and 4.

With respect to their temp gross margin, I also expect to see it coming back from the roughly low level of just under 20% in the first quarter to something that should be at least over 20%, if not say 20% to 21.5% something like that.

So again, our comments on the temp gross margin, the one place we're expecting to see that come back certainly is in North America.

And then with respect to their earnings, North America has done a lot of work both on their infrastructure, as well as on the productivity of their people.

And notwithstanding that their sequential pattern, exactly as you point out Mark, is lower.

Their sequential earnings are lower.

Their year-over-year leverage is actually terrific.

So when we think about the whole of the Americas segment and we think about how the earnings are going to increase over the year, we're expecting North America to be giving us $4 million to $4.5 million to $5 million of that.

So on their revenue growth, we're expecting to see them contribute very well.

Great.

Great.

And can you -- Mary Jane, can you give any sort of qualitative comments with regards to the change in leadership, what are you hearing from the field?

Has there been any change in terms of turnover rates?

Has there been any freezing of plans?

Or how has that all been managed?

Yes, sure.

Okay, well, let's take the questions in the reverse order.

Freezing of plans, none.

So we spent a lot of time with our Board and the Board did a wonderful job with Manolo, as well as other candidates they talked to, talking about what the goals for the 2011 year were for the Company.

And part of that activity was trying to be sure we had a very clear and visceral understanding among everybody about what the goals for the year would be and how the people would progress.

Myself, my colleagues, as the year unfolded, we're very fortunate to have Manolo here appointed relatively early in the year.

But because that wasn't a certainty, we needed to be sure that we didn't do what a lot of companies do, which is just freeze.

So we didn't.

We are very clear on the growth trajectory we're looking at.

We continue to focus the organization on moving in the high-margin professional space.

Notwithstanding we had overhangs of lower gross margins into the first quarter, we do not see that persisting for the whole year and already see positive signs.

We're very happy to see the talent management business coming back, which we thought it would.

So overall, I think everybody in the Company is very committed to the goals that we set for the 2011 year.

And the good news is, of course, among the leaders in the Company, those who are very important and run our regions, they are very committed to those goals, it's a source of pride and celebration for their people.

So there not only is no reason to freeze, there is active momentum to be on with what we said we would be on with.

As far as the reactions from the field are concerned to our new CEO's announcement, we are very fortunate that he made the time to visit some of our locations to meet everyone.

And some of that's part of his due diligence, too.

But consequently, quite a few people in the Company have actually met him and the response to both what they've read about and you can imagine everybody in the Company Googled him, but also meeting him has been overwhelmingly positive.

I think what they see is a very intelligent and very much in the spirit of our industry, very supportive balance of performance and engagement, retention, as well as profitability together and helping to communicate that well with our people, but that optimization, the optimization of those four factors is very important.

I think people have found really enlivening.

So I think that's a really good start and I think people feel that that the thinking is very simpatico with where they are as well.

With respect to the question of turnover, I think we've had no turnover with respect necessarily of the change in our CEO process.

I mean people have taken that as the handoff from a good CEO we've had for eight years to a new and good CEO as well.

We are experiencing turnover as a factual matter.

I think that's to be expected, as people continue to see the revenue very high despite all the interesting economic crosscurrents and that's important for us to be able to counteract.

But we've seen that issue before.

I think we have a lot of positive things in our favor as we go into the '11 year and I think we have a lot of good arrows in our quiver to be able to both recruit excellent people to enhance our Company, as well as keep the people who are strong and excellent performers.

It's great to hear.

Thank you very much.

(Operator Instructions) There are no further questions at this time.

Are there any closing remarks?

Yes.

Thank you, operator, and thank you all for joining the Hudson Highland Group conference call for the first quarter.

Our call today has been recorded and will be available later today on the Investors section of our website, hudson.com.

Thank you and have a wonderful day.

Thank you.

This concludes today's teleconference.

You may now disconnect.