Hudson Global Inc (HSON) 2012 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hudson Global Quarter Three 2012 Earnings Conference Call.

(Operator Instructions)

Mr. Kirby, you may begin your conference.

Thank you, Bridgette, and good morning, everyone.

Welcome to the Hudson Global Conference Call for the third quarter of 2012.

Our call this morning will be led by Chairman and Chief Executive Officer, Manolo 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 appliance 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 the analysts' expectations or estimates, or the 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, at hudson.com.

I encourage you to access these documents at this time.

They are posted on our website under, Featured Documents, and our speakers will reference them throughout their remarks.

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

Thank you, David, and good morning, everyone.

We are conducting this call from New York, where the situation is still very difficult for many.

And we would like to say a special thank you to all of those joining us from the three-state area.

Today, we released the results for the third quarter of 2012.

And as you are well aware, during the third quarter the business environment deteriorated farther due to ongoing and persistent global economic uncertainties.

Challenged by these conditions, many of our clients applied broad cost controls.

In the areas that affect our business more closely, plants have frozen or minimized hiring, delayed project starts and, in some cases, shifted to [entirely] stop recruitment.

To battle these trends, our dedicated teams work hard to demonstrate a deep understanding of our client and candidate needs, as well as an increasing excellence in our service-delivery capabilities.

In addition, the streamlining actions that we have taken since the beginning of the year have helped adapt our operations to better cope with the current conditions.

Our financial performance in the third quarter was consistent with the cautious outlook we communicated after the second quarter.

Our third quarter revenue was $188 million, down sequentially from the second quarter by 8% on a reported basis, and 9% in constant currency.

The year-over-year decline in Q3 was 23% in reported currency; 21% in constant currency.

Gross margin was down 25% in constant currency, as compared to the same quarter last year.

Our actions taken to offset these conditions resulted in 22% lower SG&A than prior year.

Adjusted EBITDA was $1.5 million, which was within our expectations of 0 to $2 million.

Our restructuring actions in Q3 included $1.5 million in severance and real estate costs.

Our EBITDA was $700,000, including $0.5 million in a business tax refund.

We experienced a net loss of $2.2 million.

Mary Jane will provide more detail on our third-quarter performance shortly.

In this challenging environment, we have not yet been able to deliver the bottom-line results we want.

However, I pleased with the progress we are making on our strategy, positioning ourselves as a world-class global provider of talent solutions.

First, we are creating an organization with increasingly deep client relationships.

Second, we are building a powerful global platform.

And third, we are right-sizing our operating structure to position us for growth and solid profitability when conditions improve.

Let me briefly share with you some examples of our progress in these three areas.

In the first area, I mentioned that our teams have continued to develop their client relationships, winning major talent-solutions projects across the world.

I would like to give you some client examples here, from Belgium, the Netherlands, UK and China.

In Belgium, we have won a major 4-year talent-management contract with the European Aviation Safety Agency, EASA, of the European Union.

The agency, as you know, is responsibility for insuring the highest standards of safety in aviation in Europe.

The EASA contracted with Hudson's experienced talent-management team to design and implement 50 assessment centers and 40 development centers per year.

We will help them identify high-potential candidates and develop critical leadership skills in order to maintain the EASA as the center of excellence in aviation safety.

In the Netherlands, we are advancing our added-value strategy by evolving from providing contract-engineering staff to delivering engineering project solutions.

We have been subcontracted by one of the world's top 10 engineering-consulting firms, ARCADIS, to provide tender support and project-management controls for a major road-development project.

In the UK, we won and commenced a major project assisting a large financial-services company to spin-off a portion of its retail banking unit.

During the next 12 months, Hudson will be responsible for managing the recruitment of more than 1,000 professionals in core corporate functions, including HR, Finance and Marketing for the new entity.

We will provide services, including direct recruitment and selection, coordination of assessment centers, and onboarding processes, as well as management of third-party agencies to insure a rapid and successful staffing of this spin-off.

In China, our Pharmaceutical business has started to reach critical mass on the basis of our functional expertise and growing track record within this key industry.

We are assisting one major global pharmaceutical client in the relocation of its regional commercial and business-development team from Singapore to Shanghai, where the company's establishing a greenfield site.

And we have also secured a preferred relationship with another leading global pharmaceutical firm to help the company build its R&D capabilities in China; one of the most challenging functions to recruit in the region.

In the second area of progress, I mentioned before that we have continued to enhance our global business platform to better position Hudson for growth when conditions return to normal.

Let me share with you here our most recent development in RPO, legal e-discovery and talent management.

RPO continues to make progress on a global scale, even though the decline in global hiring intentions have softened the pace of hiring.

We expanded our RPO client base by 7%.

Gross margin grew by 8% in the third quarter to prior year, and 3% sequentially.

We had standout performances from Europe and Asia, where gross margin grew by 88% and 33%, respectively, on the strength of 6 new client wins across a variety of sectors.

Hudson has also been honored for the third consecutive year with an improved ranking in the renowned Baker's Dozen List of leading global RPO providers published by HRO Today.

On the legal e-discovery front, our business partnership with Recommind has begun to bear fruit.

In Q3, working with Recommind, we entered into an agreement to become a preferred provider of managed review services to one of the world's leading technology companies.

We have also -- now have several mutual clients.

And furthermore, recent court decisions have approved or require use of predictive coding, which we expect will give our partnership added momentum.

Our first-mover advantage in this critical evolution of the use of technology-assisted review has also been validated by our competitors who, since then, have begun to augment their own software offerings.

Finally, our Talent Management business increased gross margin this quarter by 4% globally in constant currency, with particularly strong growth of 31% in Asia-Pacific.

Our proprietary tools are a significant asset we have continued to leverage with clients around the globe.

The talent-management business is acting as an enabler to improve our positioning by adding value in both our Recruiting and RPO businesses.

Finally, in the third area of progress, we are laying the foundation to deliver profitability on our stated long-term earnings trajectory.

A streamlined organization both at the front and back-office level provide us with a leaner cost platform and more significant earnings opportunity when conditions improve.

At the front office, we are using our experience from the RPO model to begin implementing pilot of more efficient delivery models in the UK, Australia, New Zealand and the United States to serve our large-volume accounts.

And the overall actions we took to right-size our business contributed to notable SG&A reductions.

Since Q4 2011, we have lowered SG&A by 16%, or $12 million, against a gross-margin decline of 20%.

Compensation costs are down 17% in that timeframe and in comparison to the third quarter of 2011, we were able to offset three quarters of the 25% decline in gross margin.

2012 is proving to be a difficult year for our industry.

But the examples of our successes I have outlined today show that we are making progress on our strategy.

We would like to have seen this progress reflected meaningfully in our financial performance.

But under the current circumstances, what we have done is use the market headwinds as the catalyst for accelerating our transformation while remaining focused on the existing market opportunities.

During the third quarter, I visited our offices in 12 countries throughout the Americas, Asia-Pacific and Europe.

I spent time discussing business opportunities directly with our clients and with our people.

Our clients speak highly of our organization, about the service we provide, and about the teams that work with them.

And our people are enthusiastically committed to our newest strategy.

We are convinced that Hudson is on the right path, prepared to win in this difficult economic and business climate and ready to capture growth opportunities that will unleash our full potential when the economy recovers.

As I discussed with you last quarter, in this environment, our goals are to stay focused on execution, deliver on our commitments and continue to implement our strategic vision.

And as we reiterate our dedication to progress in our journey, I would like to recognize once more and express my appreciation for the confidence that our investors, employees, clients and candidates place in us.

I will now turn representation over to Mary Jane Raymond, who will provide further details on our third-quarter results.

Thanks, Manolo, and thank you all for joining us this morning.

We've posted some slides showing our results on the Hudson Website, which you can reference during the call.

Manolo discussed the persistent market conditions, which are affecting our clients' businesses, as well as ours.

The Americas revenue was down 18% from prior year, with gross margin down 30%.

About a quarter of that gross-margin decline is from our exit of unprofitable businesses -- businesses that were more [perm] concentrated.

In doing so, we were able to eliminate nearly $2 million of support costs.

This also allows us to focus our time on business lines that have greater growth potential.

The remainder of the decline is attributable to slower legal projects, though, by the end of the quarter, we began to see a steadier flow of work in our legal e-discovery projects, particularly larger ones.

The Americas' adjusted EBITDA of just under $800,000 was something of a disappointment.

But we expect the return on revenue for the year to still be near the level of last year's return on revenue.

Europe performed as expected.

Revenue declined 18% in constant currency and gross margin declined 21%.

Much of that revenue decline came from the UK, although the continued European economic uncertainties took more of a toll on our continental European revenues this quarter than they did last quarter.

Our professional contracting businesses in Belgium and the Netherlands, for example, provided a good counterbalance, though, to the market declines in general.

Europe's adjusted EBITDA was $600,000, with the UK's profitability relatively steady from the previous quarter, due to effective cost management.

About $1 million of our restructuring charge this quarter was in Europe.

While cost actions are harder to take in Europe, our teams have worked very well together to simplify our support structure, as well as our delivery models to allow us to reduce cost and provide our teams with more client-facing time.

In Asia-Pacific, revenue declined 25% in constant currency, and roughly the same at the gross-margin level at 26%, although China was more resilient than the region overall.

Our Shanghai and Beijing offices made good contributions, with the small declines we see in China coming from lesser hiring in the IT vendor space that tends to be more dependent on capital expenditures.

Clients in Australia remain very cautious on hiring and new initiatives.

But interestingly enough, we're seeing some very good growth in the assessment services from our talent-management business, not just growth in the outplacement service.

This seems to indicate that clients are eyeing the future and preparing to tackle new growth opportunities as they materialize.

Asia-Pac's adjusted EBITDA was $4.7 million, or 6.4% of revenue, with very good cash performance this quarter.

Regarding our restructuring plan, we continue to make progress on our actions to optimize our sales and delivery models and to move towards shared services.

We eliminated 30 positions in the third quarter; 210 in total for this year, fairly equally divided between the front and back office.

Our work on our sales and delivery models will be major focus over the next 6 months as we continue to align our front-office resources with our clients' economics.

Our charge is $7.6 million year-to-date.

We had expected to realize 50% of the charge value on an estimated $8 million, or about $4 million in savings this year.

However, because most of the actions were taken in the second quarter, we will more likely realize something close to 75% of the savings this year.

On a fully annualized basis, we still expect the savings to be two times the level of the charge.

Finally, let me give you, on the quarter, a few financial points.

Our stock comp was $500,000, compared to $1 million last year.

We are accruing our performance grants at a lower level, accounting for the difference.

Our total 2012 stock comp expense is expected to be about $3 million.

Our tax rate as a percentage of pre-tax income isn't meaningful this quarter.

For the year, similar to the discussion we had last quarter, we expect to record an overall tax benefit of $2 million to $3 million, barring any unusual items.

Our DSO was 49 days, improving by 1 day from last quarter and 4 days from Q1 of this year.

Capital spending was $900,000 in the quarter.

I expect the fourth quarter to be in the same range or less.

Year to date, we've incurred $7.8 million of CapEx, which includes $3.8 million in cash and $4 million from landlord-funded improvements for the move we made to a more affordable property in Sydney, Australia.

We ended the quarter with $35 million in cash, $50 million in available borrowings, for total liquidity of $85 million.

We generated $7.9 million in operating cash flow during the quarter, with no borrowings on our revolvers worldwide.

Year to date, our normalized cash flow from operations is $5 million.

For our guidance, let's start with the fourth quarter.

For the fourth quarter, we expect to see ongoing reduced levels of demand.

We expect revenue declines consistent with the third quarter or, specifically, a decline between 21% and 24% at prevailing exchange rates.

We expect adjusted EBITDA will range from zero to $3.5 million, with a charge of less than $1 million.

On an annual basis, revenue is now likely to be closer to a decline of 17% to 19% for the year overall, compared with our previous expectation of 15%.

We as a management team and all of our colleagues have agreed to work very hard to reach breakeven EBITDA for this year, but that will be a challenge, and it may be somewhat less.

Nonetheless, it remains our goal.

And in addition to that, we expect positive cash flow from operations after funding the restructuring charge for the year.

This isn't the year we expected.

But we're using it to our advantage all the same.

As our clients face more challenges, it does give us the chance to up our game.

This will improve our market position and our profitability on a go-forward basis.

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

(Operator Instructions)

And your first question comes from the line of Jeff Silber, Capital Markets.

Hi, Jeff.

Manolo, in your prepared remarks, you mentioned something briefly -- that you're seeing some of your clients shift to internal-based recruitment.

I'm wondering if you can comment a little bit more about them.

Are they using products such as LinkedIn internally a little bit more?

Is that where you think the shift is coming?

Yes, absolutely.

That's exactly -- you read that remark very well.

And that's exactly what we already kind of thought was going to happen a year ago.

If you remember when I started in Hudson and developed the strategy of -- the new strategy for the Company -- one of the five key strategic initiatives (inaudible) presence.

We know that social networks was going to make a major impact in recruiting on the areas that are more commoditized of the market.

And that trend has accelerated in the past few months.

So moving up the value chain, making sure that we concentrate ourselves in the critical jobs where industry and sector experience is more important embedding talent management tools so that we can offer an added value from what is merely a brokerage function, which is what social network provides.

It's absolutely essential.

Great.

That's helpful.

And actually, just a follow up on that -- are you seeing -- you mentioned the trend accelerating -- are you seeing that across the board in your geographies and the different verticals, or is it just focused in a few just specific areas?

No, it's happening everywhere.

And when I talk with executive search companies -- the ones that are at the top -- they're saying that, too.

This trend is going to be here to stay.

So, it's pushing -- it's making a big change in the value chain of the industry.

I mean, there is bad news and good news.

I mean, the bad news is that when you were enjoying more of a brokerage business which was easier to perform, that business, over time, is going to be gone.

You might be protecting yourself in some areas.

Mainly what you are working with are small and medium enterprises, but that is bound to be gone.

And if you want to be there, you have to dramatically change your delivery models, adjusting your [cost] structure, which is also what we are doing using our RPO model.

Okay, great.

And the good news is that this offers a great opportunity to win market share for those companies that have the tools to perform higher up the value chain.

And I mean -- I'll give you a specific example.

In one of the visits that I referred to, that I made, in this case, to China meeting with a very large industrial company there they said that they are now doing 70% of their recruitment with internal staffs using social networks -- 70%.

And what they said is, but, on the 30% that we are going to work with external providers, Hudson is going to have major market share because you are much more equipped to understand our needs and to bring the added value that we expect.

In fact, our business with that particular account has increased rather than decrease with this move.

All right.

Thanks.

That's very helpful.

And, Mary Jane, just a couple of numbers-related questions for you -- in terms of your 4Q guidance, if it's possible to give us revenue and EBITDA trends by specific geographic region, that would be great.

Sure.

Well, just to remind you, we don't give regional guidance.

But just to tell you roughly, trend-wise -- in North America, as we said, they had a bit of a weak quarter.

We expect them to pick up a little bit.

I wouldn't describe it as material, but at least a little up on Q3.

New York is obviously a pretty major office for us.

We weren't completely unmindful of the hurricane, but the exact impact of that is probably not really included here.

But nonetheless, I do think that the US will have a stronger quarter in the fourth quarter.

With respect to Europe -- a little bit of a mixed bag.

I think they will at least be flat to the third quarter, if not up a bit.

As you know, just seasonally, they tend to have a less strong third quarter.

But Christmas also starts to intervene.

With respect to the Asia-Pac market -- the Asia-Pac market does tend to have a slower Q4 than in Q3.

So I think if you think about trends in general, my sense is, on actual percentage decline, if we do that -- I think the US and Europe will be a little bit less weak than they were in Q3, with Asia-Pac more or less about the same on a year-over-year basis.

With respect to the EBITDA, I expected the US to be a very good contributor to the fourth quarter; they normally are, and I think that they will do that again.

Europe as well -- the mix of the seasonality in Q3 does tend to make Q3 a light contributor with respect to EBITDA.

And so, therefore, I think fourth quarter will also be good.

With respect to Asia-Pac, however, they have a history of having a lower fourth quarter and, therefore, I think they will.

So if we just look at the range against the Q3 actual, certainly I don't expect the US market and the European market to be certainly less than Q3 and, in fact, I think they'll contribute, whereas I do expect Asia-Pac to perform as they normally do and be somewhat less than the third quarter during the fourth quarter.

Okay, great.

That's very helpful.

Thanks so much.

Sure.

(Operator Instructions)

And there are no further questions at this time.

Well, thanks very much for all of you joining us and look forward to our report back to you at the end of the year.

And I'll close the call.

Thank you, Manolo, and thank you all for joining us today on the Hudson Global Third Quarter Conference Call.

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

Thank you, and have a great day.

Thank you.

This does conclude today's conference call.

You may now disconnect.