Hudson Global Inc (HSON) 2011 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hudson Highland Q3 earnings call.

(Operator Instructions) Thank you.

I'd now like to hand the call over to Mr.

David Kirby, Director of Investor Relations.

Please go ahead, sir.

Thank you, Brent.

And good morning, everyone.

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

Our call this morning will be led by Chairman and Chief Executive Officer, Manuel Marquez, and Executive Vice President and Chief Financial Officer, Mary Jane Raymond.

At this time I will read the Safe Harbor Statement.

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

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

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

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

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

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

They are posted on the website under featured documents.

With that, I will turn the call over to Manuel Marquez.

Thank you, David.

And good morning, everyone.

We released our third quarter financial results earlier this morning.

I would like to share a few highlights and provide some updates on our key initiatives, including the organizational changes announced two weeks ago.

Mary Jane will then give you a more detailed review of our operational results and trends by region and business segment.

In the third quarter we delivered $245 million in revenue and $93 million in gross margin.

This represents growth of 22% and 24%, respectively.

We continued to benefit from a currency tailwind, but this still translated to 14% and 15% growth, respectively, in constant currency.

In spite of the unsettling macroeconomic condition all of our regions delivered solid growth compared with prior year.

Hudson's balanced portfolio of business lines and specialty practices have once again proved to be a valuable asset.

However, more than anything else, the single most significant factor responsible for our continued performance improvement has been our people's outstanding professionalism and commitment.

I would like to express once again my gratitude to Hudson's Teams across the world.

Our third quarter EBITDA was $7.4 million, and our net income reached $3.4 million.

Both reflect significant improvements from the third quarter of last year.

Then we delivered EBITDA of $1.2 million and a net loss of $1.9 million.

Our EBITDA over revenue ratio this quarter at 3% more than tripled that of last year.

Furthermore, I am confident that the initiatives we have embarked upon will continue moving us towards our long-term margin goal of 7% to 10%.

Three months ago I described to you four key initiatives designed to improve our long-term market position and earnings potential.

Let me briefly report to you our progress on that front.

First, I spoke of our efforts to better align our business units globally and capitalize on best practice across borders.

We announced global practices to focus on two of our fastest growing businesses -- RPO and Legal e-Discovery.

Our newly appointed global leaders have hit the ground running.

This quarter they have jointly contributed over half of our gross margin growth.

During the third quarter our RPO Team continued to win additional nationwide arrangements in the U.S.

and Europe.

We have landed a major global pharmaceutical engagement, and expanded the global footprint of existing clients in Australia and New Zealand, to Asia.

On the other hand our Legal team continued to expand its capability to help clients with more complex matters.

Over half of our Legal engagements this quarter included project management, compared with only 15% two years ago.

To further progress on our global initiatives we have also announced a new, simplified operating platform.

By organizing our operations into three regions -- America, Asia-Pacific, and Europe -- we will facilitate greater alignment with our global clients' needs, better coordination of our global activities, and more efficient utilization of our resources.

Stephan Carter, Mark Steyn, and Mike Game, previously heads of North America, Australia, and New Zealand, and Asia, respectively, have been appointed to lead the operations in each of the new regions.

Second, after the appointment of our Chief People Officer, we began to undertake a series of actions to improve the capabilities, engagement, and productivity of our teams.

Under the One Hudson theme we have rolled out a Company-wide communication and collaboration program.

Although it's still early to account for specific results of our new people initiatives, sharper business focus has helped us improve on our key productivity metrics during the quarter.

Our EBITDA leverage has taken a good step forward at 54% in constant currency, compared with 31% in the first half of 2011.

Third, to avoid lower margin commoditized business we redirected our efforts to selective clients who need to fill critical jobs or deploy more specialized staffing solutions.

A better mix of business in several regions has advanced our Temp gross margin 150 basis points in constant currency during the quarter, our strongest improvement in over eight quarters.

A good measure of how much our clients value those services is our client satisfaction index, the net promoter index.

We have just received the latest survey from North America, which showed best in class results.

And, fourth and last, to deliver a compelling detailed presence for our clients and candidates we have created a new role that integrates our existing technology, information, social media, and branding efforts.

This is an area that is critical to our Company's future and will receive attention and investment.

Our new Chief Knowledge Officer, Steve Zales, brings to Hudson 15 years of experience in launching and managing digital businesses across a wide variety of industries, including media, entertainment, lifestyle, and recruiting.

And Steve and his Team will shortly roll-out our new website, which will improve our lead generation capabilities with 27 country sites in 12 languages.

In 2012 we will evolve our digital presence to provide more valuable interactive tools for candidates, add meaningful services for clients, and deepen the integration of our business with the social media platforms that are widely used by both clients and candidates.

In summary, despite a deteriorating economic and business environment this quarter, we again delivered a significant earnings increase, while establishing a stronger foundation for further growth.

It seems likely that harsh economic conditions will continue during the fourth quarter, with companies delaying investment and hiring decision.

But, nevertheless, I have no doubt that the combination of the strong, dedicated Teams across our regions and a continuous focus on our key initiatives will help us weather these challenges.

Even if the current condition causes us to embark on our fourth quarter with due caution, 2011 has already proven to be a major turning point in growth and profitability for Hudson.

Our Leadership Teams feel honored by the confidence that our investors, employees, clients, and candidates have placed in us.

We are very pleased to see our earnings trajectory confirmed this year, and will be fully engaged to continue driving our Company value towards its maximum potential as we move forward.

And I will now turn it to Mary Jane, who will offer to you more specific details on the quarter.

Thanks, Manuel.

And thanks to everyone for joining us today.

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

They show our Q3 2011 results compared with prior year.

I'd like to add my thanks to our colleagues around the world for their terrific work this quarter.

The progress we are making is the result of better focus on our core business drivers and the teamwork of our people, both in and between countries.

Our revenue of $245 million was stronger than we anticipated.

Certain concerns we had early in the quarter about the affects of the economic slowdown on our business did not come to pass until later in the quarter.

The currencies were pretty strong until September, and we had some third quarter assignments in Continental Europe that were good wins by our Team.

Our geographic portfolio helped, as well, muting the expected third quarter dip.

Our total gross margin of $93 million increased 24% on a reported basis and 15% on a constant currency basis.

At 37.9%, that's a 50-point improvement over last year in both reported and constant currency.

We are very proud of our Legal and RPO Teams for their strong contributions again this quarter.

In addition to their good work, another 25% of our growth came from other improvements in our temporary contracting business, particularly in Australia and Continental Europe, as our Teams focus both on improving the type of business and the level of placements they're working on.

Perm also improved in the third quarter, at the same rate it did in the second quarter.

EBITDA for the quarter was $7.4 million or 3% of revenue.

This improvement is a function of the improved gross margin we've just discussed, as well as better utilization and productivity.

The U.S.

and Australia made particular strides in these areas.

In fact, the U.S.

was the single largest contributor to our constant currency gross margin growth, both in absolute dollars and in percentage terms, and they delivered 25% of the adjusted EBITDA improvement in the quarter.

As you may remember, North America was a major contributor in the second quarter, as well.

Turning to our regional results, our European business benefitted from three major trends in the third quarter.

The first is that the UK continued its good work in the support of our cross border legal work.

This helped deliver 9% gross margin growth in constant currency in the UK, and 11% in Europe, overall.

We had excellent project wins in Belgium and the Netherlands, as I referred to briefly already, and their overall good cost control in Europe helped deliver constant currency leverage in excess of 75%.

But life wasn't completely rosy in Europe, either.

For example, our Teams had to deal with the declines in the financial services sector, something that had a more pronounced affect on the UK.

But they did well and delivered $3.9 million in adjusted EBITDA, a significant improvement over the $1 million delivered last year in the third quarter, as well.

Australia and New Zealand delivered our highest EBITDA in this quarter at $5.4 million, along with some good accomplishments for their part, as well.

The Temp gross margin was up 110 basis points from securing a better mix of business.

The delivery of results from our newer staff resulted in constant currency leverage overall of 61%.

As we noted we had strong contributions from our ANZ and RPO Team, and finally the ANZ Team has successfully grown our professional engineering practices in response to the needs of our clients in the natural resources sector.

Turning to Asia, the quarter was led by continued strength in China.

Our China business grew 35% from our services and recruitment, talent management, and RPO.

Our experience in RPO and in Asia combined make us a good choice for clients who are considering RPO solutions for the first time and considering trialing them in Asia.

However, our businesses in Singapore and to a lesser extent in Hong Kong have been slower, particularly due to restrained hiring in both the banking and the high tech sectors.

Asia's adjusted EBITDA contribution was $1.7 million or 16.8% of revenue at the adjusted EBITDA level.

In North America they delivered another noteworthy quarter.

Revenue grew 26% and gross margin 47%.

This was driven by growth in Legal and RPO, as well as rising temp contracting margins from an increase in the strategic solutions that we are offering to clients.

Finally, as we've been noting for a few quarters, IT was up 15% from a year ago.

North America's adjusted EBITDA of $2 million or 4.1% of revenue was up $1.8 million from a year ago.

A few other points to note for you.

Our net income in the quarter was $3.4 million or $0.11 a share.

Net income included $1 million of stock compensation expense in the quarter.

The stock comp is consistent with last quarter and is about $600,000 higher than the third quarter of 2010.

Regarding the stock comp overall, let me expand on that a little.

There are two drivers of this increase between this year and last year.

The first is that for the February 2011 grant the stock price was 40% higher on the date of the grant than it was on the date of grant for the 2010 award.

The second is that we issued 25% more shares, largely for retention.

For the full year our stock comp will be about $4 million compared to $1.7 million in 2010.

Our tax rate was 39% in the quarter.

This was driven by a relatively large proportion of losses in the Continental European countries where we cannot benefit the losses for tax.

It's always a bit tough to predict the exact mix of earnings and losses across Europe, especially in the typically weaker third quarter.

Having said that, the U.S.

is now in a positive income position, and we are slowly beginning to show the benefit of the NOLs there.

For the full year we expect the tax rate to be between 30% to 35%, depending on the mix of income.

Our cash flow from operations was a use of $7 million in the quarter.

We had additional temporary contracting payroll in one of our main markets, and somewhat slower collections from our clients that we had expected to partially offset this.

Although we have made investments this year in the working capital to support the growth that we've had, we expect the cash flow to be breakeven for the year.

Our total liquidity is $72 million, with just over $22 million in cash and $50 million in available borrowings.

We had $6.6 million borrowed on our credit facilities at the end of the third quarter.

Our capital expenditures were $1.8 million, and for the full year we expect to spend approximately $7 million on CapEx.

Our restructuring reserve associated with our past restructuring actions continues to decline.

It is now $1.7 million.

Most of it's property related and, as such, it will pay-out over the next few years.

The cash payments on restructuring in the third quarter were $700,000 compared with $1.2 million a year ago.

Turning to our guidance, we expect revenue of $225 million to $240 million at current exchange rates, and EBITDA of $6 million to $9 million in the fourth quarter.

This guidance compares with revenue of $219 million in the fourth quarter of 2010 and EBITDA of $3.6 million.

We always set guidance at the prevailing exchange rates, and we're doing that again, of course, this quarter, but the wider range does incorporate some possible currency gyrations.

It also assumes that mix conditions continue in our various markets, which given the recent news, particularly in Europe, could just about go in any direction.

Regionally we expect revenue to be flat to down sequentially with Q3, with the exception of North America, and for EBITDA we expect directionally similar results in the fourth quarter as compared to the third quarter, depending, of course, on how conditions develop.

The trends so far for October aren't bad, and certainly we see some small rebound from the low point we saw in early October, both in terms of currency and sentiment, even though that's changing this morning.

But overall that's a pretty good sign as we begin to move through the majority of October here.

For the full year our Q4 guidance would result in the total year's revenue growth being 18% to 20% on a reported basis and 11% to 13% on a constant currency basis.

EBITDA would be in the rounded range of about $24 million to $27 million.

This EBITDA compares to $6.5 million last year for the full year, and as you may remember last year's result included about $4.5 million of non-operating income from the monetization of certain financial instruments associated with past divestitures.

As was said throughout this year, we are committed to our earnings improvement.

Our Teams around the world are both committed to and excited to deliver a strong year.

In doing so we are looking forward very much to achieving a stronger and better Company for our clients, our candidates, and ourselves.

With that, Manuel and I would be happy to take your questions.

(Operator Instructions)

Your first question comes from the line of Morris Ajzenman with Griffin Securities.

Good morning.

Hi, Morris.

How are you?

Hi.

Okay, thanks.

Just a quick question here, your guidance here, if you take the midpoint for the fourth quarter, call it $232 million, $233 million, on a sequential basis your revenues would be down close to 5% third to fourth quarter, yet your EBITDA at the midpoint would be flattish versus the third quarter.

Just put a little color on that?

Is there a mix assumption in there helping sort of the margins from that perspective of revenues being down?

Is it better productivity, better cost controls?

Based on those assumptions, the midpoint, what contributes to the better margins sequentially?

Well, I think a few things.

First of all, obviously, because the revenue number is so much larger the currency has a bigger affect on the revenue, so just bear that in mind.

But as to your general question about the margins, as we've said, we would expect to see the improvements that we've seen in margin continuing, so, yes, there is a mix affect built into that.

But, second of all, earlier in the year we talked about the expectation of productivity and delivery off the addition of people we added at the end of 2010 and the beginning of 2011.

And, as you can see here in the third quarter, we are delivering on the promise of better leverage in the third quarter, and we would expect that to continue into the fourth quarter.

We would also expect, obviously, that it tends to be a little bit lower quarter in Australia and a little bit stronger quarter in Europe, so we have a mix of both where the revenue is coming from, as well as what the revenue would be.

Okay, and just one last question, the guidance you kind of feel for October trends not being too bad -- is there any diversions Europe versus other regions with what's going on into October, is that region also not too bad?

On an overall feel how does that play-out so far?

So what you're asking is -- with October not being very bad is it still pretty much in the pattern we saw in Q3 in terms of performance and what we would expect and how the guidance was set?

Well, specifically for Europe in this case, because that's where this maelstrom is really brewing?

Yes, of course.

Well, I mean certainly every day it's a different story, a little bit from Europe.

But I would say that particularly for our businesses in the Netherlands and Belgium, who both won some nice work in the third quarter, that work does continue into the fourth quarter and is continuing.

So that is a good support there.

But, frankly I don't think any of us would take bets on what's going to happen in Europe.

Thank you.

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

Hi, Jeff.

Thank you very much.

Good morning.

In your prepared remarks you highlighted a lot of things, but one of the things that jumped out at me was the improving gross margin trends in the Temp business in America, so I was wondering if you can give me a little bit more color on that?

And is that something we expect to continue?

Yes, as I have mentioned before, the major strategic development that we are doing in North America in Temp is linked to our Legal e-Discovery practice, and what we are doing there is to improve the service and the value added of our offer there.

And I mentioned in my brief remarks that in this third quarter 50% of our assignments are having project management services included versus only 15% two years ago, so that shows that added value which is certainly the major component that improves our gross margin percentage.

And Legal represents roughly how much of your gross margin in the Americas?

More than half.

More than half.

Okay, great.

You -- I think, Mary Jane, you were talking a little bit about some of the hiring efficiencies that you expect to get and continue to get in the fourth quarter.

Can you just remind us where by region you had most of those hirings over the past year or so?

Sure.

Well, obviously, the main one was in the Australian, New Zealand region.

And that was what contributed, as you may remember, to some dampened leverage there.

So that was probably the main area where we saw increases.

But, frankly, we've also seen increases in North America, as well.

The growth of the Legal business, the growth of the project management function has contributed to that, as well.

And then just normally there's still hiring going on around the organization, but the major ones really were in Australia and New Zealand and North America.

All right.

A few numbers questions -- I notice you broke-out RPO separately in revenues and gross margins.

Did that used to be part of the Perm business or part of the Talent Management business?

RPO?

Yes?

RPO has typically always been part of the Perm business.

Part of the Perm, okay.

All right, great.

And were there any share repurchases during the past quarter?

No.

All right.

And then, finally, in terms of fourth quarter guidance, can you tell us what to expect for both D&A and capital spending?

Sure.

From a D&A point of view we can probably expect roughly -- hang on a second here -- about $1.5 million for D&A, so it's been pretty flat for the year, so that's probably not going to change very much.

And with respect to capital I would expect it to be in the neighborhood of about $2 million ish, possibly $2.5 million, depending on how projects actually finish-up in the year.

All right, great.

Thanks so much.

(Operator Instructions)

Your next question comes from the line of Pat Abeln with Robert W.

Baird.

Hi, guys.

This is Pat Abeln in for Mark Marcon over at Baird.

Hi, Pat.

How are you?

Great.

How are you guys?

Good.

Could you just follow-up a little bit on the slight pick-up you saw in October, you know, maybe outside of Europe?

And is that included in guidance or are you assuming more of the flattish or slightly downward that you saw at the beginning of the month?

Yes, okay, so lest I have just given you hope and I dampen it down here, let me just be clear.

One of the things that we're concerned about, and I think you've heard this from probably every company reporting in this earnings season, is some concern about the fourth quarter.

So my comment about October is we don't see lots of bad things coming to pass, not so much it's a pick-up, just so I'm not giving you the wrong steer here.

That's the first thing.

We see pretty much a good continuation of the conditions we saw coming out of Q3.

But having said that, I would say that it doesn't really have, you know, we could see that setting the guidance, it's included in the guidance, and it doesn't cause me to change it, at all, from where we've really set it.

I think there is a long time now here between here and year end, so I'm happy things are not going off a cliff in October, but anything could happen.

Okay, great.

Thanks.

And then seen really good progress on the Legal business in the UK.

I think that was running somewhere around 10% of the UK business previously.

Is that still about where it is?

And where do you think that could go over the next couple of years?

Well, I think two things.

Manuel talked a little bit about in the last quarter about the two things that tend to drive the growth in the Legal business right now across the various oceans.

The first one is that the U.S.

regulators are having more to say about wanting to have at least some insight into documents that might reside outside the United States.

And in cases where those are not allowed to be moved backwards, moved into the U.S.

to be examined, they're being examined overseas.

That's the first thing.

The second thing that's driving that is that countries around the world, particularly those that might be considered commonwealth countries, have a set of juris prudence rules that are very similar to the United States, and they are having more activity in antitrust, mergers and acquisitions, things that are associated with foreign corp practices, and that's driving work overseas.

At this point, I'd say that the Legal work is still about 10% in the UK.

We've always had a reasonable amount, we're just seeing more crossing the borders.

It tends to be a better solution.

And in terms of where it could go, I don't know, I think there was a time probably a year ago when, as short as a year ago when we'd say, you know, the practice was never going to go outside the United States, and now it is.

So I think we will continue to monitor that, and we would expect to see growth there.

I don't know that we can put a number on it right now, but it is an important part of our Company, and it'll continue to be so.

Okay, thanks, guys.

(Operator Instructions)

And we have no further questions in queue at this time.

Okay, thanks very much, all, for joining us today.

And I will be looking forward to report year end shortly.

And confirming, as we said, a turning point in our profitability and earnings trajectory.

Thank you, all, for joining us on the third quarter conference call for Hudson Highland Group.

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

Thank you.

Have a great day.

This does conclude today's conference call.

Thank you, again, for your participation.

You may now disconnect.