Hudson Global Inc (HSON) 2014 Q3 法說會逐字稿

Good morning. My name is Arnika, and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter 2014 earnings call. (Operator Instructions). Thank you. I would now turn the conference over to David Kirby.

Thank you, operator, and good morning, everyone. Welcome to the Hudson Global conference call for the third quarter of 2014. Our call this morning will be led by Chairman and Chief Executive Officer Manolo Marquez and Executive Vice President and Chief Financial Officer Stephen Nolan.

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 that may cause actual results to differ materially from those contained in the forward-looking statements. These risks are discussed in our Form 8-K filed today and in our other filings made with the SEC. The Company disclaims any obligation to update any forward-looking statements.

During the course of this conference call references will be made to non-GAAP terms such as EBITDA and 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 materials at this time; they are posted on the website under featured documents and will serve as helpful reference guides during our speakers' remarks.

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

Thank you, David. I thank you all for joining us on our third-quarter 2014 earnings call. As you have seen from our announcement this morning we have completed the sale of our Legal eDiscovery business and significantly improved the performance of our continuing operations. Third-quarter revenues from continuing operations were $149 million, up 7.2% from the third quarter of 2013 or 4.3% in constant currency.

Gross margin from continuing operations was $56 million, an increase of 10.3% of the third quarter of 2013 and 8.3% in constant currency.

Adjusted EBITDA loss from continuing operations was $2.9 million, an improvement of 31% compared with a loss of $4.1 million in the same period last year.

These results reflect both the ongoing improvements made in our core lines of business and the important advancements made against our strategy. Before Stephen provides more details our quarterly performance, let me briefly summarize our progress on three key components of our strategy. Specifically, one, bring more focused to the highest potential areas of the business; two, create a cleaner more efficient operating model; and three, invest selectively to grow our core business.

On our first key point -- bring more focused to the highest potential areas of our business -- after the end of the first quarter we shared with you our plans to focus on our core markets and practices and explore alternatives for other parts of the business, ensuring that we maximize overall value. Today I am happy to announce the successful sale of our Legal eDiscovery business. The sale of this unit will allow us to continue investing in our core recruitment, RPO, and talent management businesses.

Our Legal eDiscovery business had built a leadership position in the Americas; however, industry dynamics continue to shift rapidly towards integrated technology and staffing solutions, and the project-based nature of the business favors a scale and industry consolidation. We concluded the business was more valuable to a company whose primary business is in the legal sector. On Friday we completed the sale of this business to DTI, the largest privately held provider of legal process outsourcing in the US.

As to our continuing operations, which now excludes eDiscovery and Sweden where we ceased direct operations in the third quarter, over the first nine months of 2014 our gross margin grew 7.3% from the equivalent period last year in constant currency. And our adjusted EBITDA loss was $5.1 million, an improvement of $7.4 million or 59% from the same period last year.

We will continue to work and ensure that our business has a sharper focus, but that alone will not be enough to reach our profitability objectives.

So on our second key point -- create a leaner more efficient operating model -- during the third quarter we began to implement the changes associated with our short-term engagement with AlixPartners, one of the premier firms in organizational design and operational excellence. As we announced previously, the annualized targeted savings on the retail business are estimated to be at least $12 million. In the third quarter we began to streamline our support functions in the Asia-Pacific regions, parts of Europe, and corporate. In Asia-Pacific we eliminated more than half of the administrative support positions, creating greater leverage for our business in the coming quarters. Overall, our current headcount for our support and administrative staff have been reduced by close to 100 people or 17% down from a year ago.

After completing the sale of Legal eDiscovery, a more focused operating platform together with our remaining efforts to drive efficiencies through our organization will strengthen our foundation to sustain profitable growth.

And finally, on our third key point -- invest selectively to grow our core business -- as we shared with you at the beginning of the year we have complemented our leadership ranks with seasoned industry professionals and have analyzed carefully our practice and geography mix to focus our resources in those areas where we have the specialized capabilities and key opportunities scale our business -- in short, in the areas where our potential to win profitable market share was greatest. Through this process, we made a substantial investment in our front office with headcount up 170 people or 16% from a year ago.

Our investment in leadership and front office staff is starting to pay off in our continuing operations.

In the third quarter, our Americas growth margin increased 19% year over year. Our Asia-Pacific gross margin increased 15% in constant currency. In Europe, progress has slowed in the third quarter amid tougher market conditions, delivering just 1% gross margin growth in constant currency after an 8% year-over-year growth in both Q1 and Q2. Our global RPO gross margin grew 27% in the quarter and talent management was up 28%, both in constant currency and as compared to the same quarter in 2013.

In summary, we believe that the combination of actions in these three typical critical strategic areas -- focusing our business, building efficiencies into our operations, and selectively investing in our core -- are helping us create the right platform for profitable growth. Hudson has made great strides in simplifying its structure, is better able to capitalize on growth opportunities, and is becoming leaner and more nimble in its execution approach in its core markets and businesses.

Our business fundamentals are therefore improving, but we are also aware that the macroeconomic environment has weakened again in Europe and it is somehow decelerating in China, which could have ripple effects not only in those markets but on the trading partners around the world. In our continuing operations, 91% of our gross margin is outside the Americas leaving us more exposed to those situations than before. However, in spite of these market uncertainties, we are confident that we are now better prepared to face external challenges than we have been in years. We have a stronger, more focused organization; greater operating discipline; and a leadership team that remains fully committed to finish 2014 on a clear path to profitable growth and sustained value creation for our stockholders.

Stephen will now provide more details on our first quarter performance and expectations.

Thanks, Manolo. Thank you all for joining us this morning. As Manolo mentioned, we have classified the results of eDiscovery and Sweden as discontinued operations in the third quarter of 2014 financial statements for all periods presented. Other than net income, the financial information that we will discuss today will refer to continuing operations only.

For the third quarter Group revenue came in at $149 million, up 4% year over year in constant currency. Growth in RPO, talent management, and perm recruitment was offset by weakness in temp contracting.

Gross margin was $55.7 million, up 8% year over year in constant currency, led by 15% growth in Asia-Pacific.

Our SG&A costs were $58.5 million, 5% higher than last year driven by a 16% increase in fee-earner headcount, mainly Asia-Pacific which was somewhat offset the savings in support costs and real estate.

Adjusted EBITDA was a $2.9 million loss, $1.3 million better than last year.

Turning to regional and country performance, we delivered year-over-year gross margin growth in many of our business lines and geographies. In Europe, gross margin through 1% year over year in constant currency. We grew Belgium 15%, which was led by talent management, and Spain grew 31%. In the UK gross margin in our recruitment business grew 3% led by 8% growth in Scotland, despite the uncertainties caused by the independence vote. England recruitment gross margin was slightly down year on year with 9% growth in perm, offset by lower temp contracting. France had a tough third quarter with gross margin 8% below 2013 as economic conditions weakened.

Asia-Pacific had a strong third quarter with year-over-year growth in revenue and gross margin of 14% and 15%, respectively, in constant currency. Gross margin improvement was driven by growth in RPO, perm, and talent management, primarily Australia and China. Australia gross margin grew 22% with strong RPO and talent management results somewhat offset by lower temp contracting. China gross margin grew 27% with strong perm performances across all markets.

In the Americas, gross margin grew 19% compared to last year. RPO delivered another strong performance with a 38% year-over-year increase in gross margin while the other business lines grew 3%.

Looking at our global business lines, RPO gross margin increased 27% year over year on the strength of significant growth from existing clients and new business wins in Australia and the US. Talent management improved its gross margin 28% year over year with strong performances in Australia and Belgium.

Here are some additional data points for the third quarter. We incurred $0.8 million in restructuring charges as we began to implement the AlixPartners recommendations, mostly severance costs in Europe and Asia-Pacific. Our Q3 results included $0.1 million of stock compensation compared to $0.4 million a year ago. Our third-quarter tax provision was a $0.6 million credit compared to the credit of $0.4 million a year ago. We ended the quarter with $19 million in cash and $28 million in available borrowings totaling $47 million in liquidity.

We had $8.2 million dollars in borrowings at quarter-end. Through September 30 our average borrowings year to date were for $4.6 million. In early August we put new credit facilities in place with Lloyds in the UK and Siena in the US. Both are excellent partners and the right match for our business in each respective market.

DSO at quarter-end was 45 days which compares to 48 days last September. Capital expenditure year to date September was $4.3 million which included $2.1 million related to landlord-funded leasehold improvements. Excluding these net outlays, we expect 2014 full-year capital expenditure of approximately $3 million.

We finished the first nine months of 2014 with an adjusted EBITDA loss of $5 million which compares to a $12 million loss in the same period last year on a constant currency basis. This improvement was achieved by growing gross margin and reducing our support costs while investing in the fee earners and absorbing the Alix and proxy costs.

Looking to Q4 we anticipate some weaker trends in Europe and parts of Asia-Pacific. Our revenue from continuing operations guidance is between $135 million and $145 million at prevailing exchange rates. This translates into a year-over-year change in revenue of minus 3 1/2 to plus 3 1/2 and a single-digit growth in gross margin with the expected mix. We expect an adjusted EBITDA loss from continuing operations of between $1 million and $3 million which compares a $2 million loss in Q4 2013. This includes $0.6 million of stranded costs relating to the eDiscovery sale which we intend to eliminate as soon as possible. Regionally, I expect Europe to lag the guidance range while the Americas and Asia-Pacific should be ahead of the range.

We expect to make significant progress in our cost base in the coming quarters with the elimination of the stranded costs and the completion of the actions stemming from our engagement of AlixPartners earlier in the year. The proceeds from the sale of eDiscovery will also allow us to pay down short-term debt and increase our financial flexibility to invest in core practices and markets. We expect that the investments we are making should generate a meaningfully positive return as we look to 2015.

Arnika, please open the line for Q&A.

(Operator Instructions)

Jeff Silber, BMO Capital Markets.

Thanks so much. Now that you have the sale of the eDiscovery business behind you, I was wondering if you believe this will potentially accelerate the timeframe of the Company to become profitable on an EBITDA basis, and if so, when do you think that will happen? Thanks.

Hi, Jeff, it's Stephen. Good morning. Yes, I think it will help. As you saw I think from some of the supplementary schedules, we were losing money in 2014 in eDiscovery, so that will help, I think. The investments we'll be making in fee earners will now be accelerated and the AlixPartners cost reductions will also now be facilitated. So, I think we are looking at a 2015 for profitability. It may not be Q1 because of some of the seasonality that we deal with in Asia-Pacific, but we are on a better trend.

Okay. That's great to hear. And in terms of restructuring, are there any more charges that are coming?

So the Alix work that we have been doing, we have $7 million approved. We spent roughly $1 million in the third quarter. I expect we will have $3 million to $4 million potentially in Q4 and the balance in Q1.

Okay. Great. And I know it's always difficult to model taxes, but what kind of tax rate should we expect at least for the fourth quarter and what would be a good tax rate to use for next year?

In the countries we are making money, Jeff, it's at the statutory level. We obviously have a mixed bag there so it's hard to really give you a precise number. There's nothing unusual that we are seeing that would throw you off what we have probably seen historically, I would say.

Can you just remind me what the statutory rates are, at least by region? Just a rough number is fine.

It's, I think, around -- I'd say 40% is probably what we are paying in I think it's the UK and Belgium maybe, so -- I may have to get back to you on that, Jeff, because I don't have it in front of me. I'm sorry.

Okay. That's fair enough. Thanks so much.

David Sachs, Hocky Capital.

Good morning. Congratulations on the eDiscovery [included impact]. In terms of the AlixPartners restructuring, the $7 million spend you said would be completed in Q1. Will the benefits begin accruing by the second quarter fully or when would the full benefit of the projected $12 million of savings that you suggested be into the income statement?

Hi, David. It's Stephen. We will see some benefit in Q4, probably several hundred thousand dollars, and we expect as it goes -- obviously we are trying to get it in as fast as possible, but I think it will be probably in the second half before we will see that solid run rate coming in.

Okay. So that would be about $3 million per quarter starting in the second half. So there's no lag from activating to getting the benefit?

Yes. Most of the savings are tied to headcount and a lot on real estate, so, yes, it should be fairly fast return.

Okay. And in terms of just some concept of potential opportunities for your different businesses at this point, RPO, you provided the revenue and gross profit percentage for that business. And I recognize it's a global business with more emphasis in Asia, but just some idea of how you see that business evolving. And is that one that you've targeted to make tuck-in acquisitions to help enhance the growth rate, or is that one that needs to be developed more organically? And then, how might you look a growing that business in the United States if we just lost a little bit of our revenue there in the eDiscovery piece, if that had any cross-sell potential or benefit from that?

Hi, David, this is Manolo. The RPO business is tracking extremely well now in the Americas and Asia-Pacific just with organic growth. We will be always reviewing opportunities as we continue and go forward, but our focus for now is on improving the core operations by organic growth, including RPO.

So, RPO today is just under 20% of our global gross margin. It represents 50% in the Americas, where we have just said it grew 58% in Q3 -- sorry, 38% in Q3 and 47% year to date. It represents 25% of our Asia-Pacific gross margin, and in Asia-Pacific in Q3 it grew 58% and is growing 20% year to date. Europe is where we are lagging in growth. As I explained on the last earnings call, we have just invested in a new team there, and we expect that we will catch up on growth there soon. But as I just explained, we are very pleased with what we are achieving in RPO. We are offering already consistent growth in two of our regions. It has been the strongest and most consistent growth business that we have had in the past two years. In the last two quarters gross margin for RPO was the highest ever that we've delivered. Existing relationships are strong; the pipeline continues to be growing.

And that -- at that business' present size how do you look at its competitive advantage? What has caused that to be as successful recently and can that be propelled without any significant external investment, but just organic growth?

I think I would relay you to the analyst reports. I think that rather than tell you how good we think we are, the best thing is to go to NelsonHall and the Everest reports that do quite of a zoom-in on our characteristics. I think we like to feel that we offer high-touch RPO business, that we are very close to our clients, that we understand their needs, that we are not kind of just offering an off-the-shelf that suits everyone, and that by approaching our clients this way in the industries where we have been operating in RPO we have a specialized expertise that our clients value.

And is there any way to look forward in terms of a pipeline for this business in terms of whether it's requests for proposal, quotes, to sense that you are gaining share. I think those NelsonHall reports ranked you ninth or second -- I don't remember if it was ninth in the US and second in Asia in terms of capabilities. But you were very well regarded by those analysts, yet your market position seems small in dollars.

Well, it's small in dollars compared with some of the big providers that are more volume chasers. So that's what I am saying -- we are more of a high-touch provider than a volume provider, but highly profitable in those -- in the matrix from Everest and the position from NelsonHall, that's the position that they are granting us. And the market is big; it's billions of dollars and still growing by 15% on an annual rate. So you don't need to kind of like, try to [cover] everything, volume and quality, and we feel that chasing quality is our best option there.

And our pipeline -- yes, it's improving; it's increasing. I think that as we do better, we create more of a brand in those regions where we grow. Success attracts success in our sourcing businesses. So, I do feel that this would continue, but we are not giving any specific guidance on how much our pipeline is growing.

Okay. I'll get back in queue. Thanks.

Mark Marcon, Robert W. Baird.

Thanks for taking my question. With regards to the RPO business, how much of it is in the Americas relative to the other regions? What's the geographic split?

About 15% of revenue, Mark, is in the US.

Is in the US. And then the rest is --

Then we have about 70% in Asia-Pac and 15% in Europe.

Okay. And are all three regions growing?

No. As we said, Europe is the one lagging.

Even in RPO?

Yes.

We had some projects that were phased out last year, and we have not been able to replace them as of today.

In terms of the European RPO, is that in the UK or is that on the continent?

It's both. Our business on the continent is actually growing quite nicely, and the UK is down.

All right. And then with regards to the sale of eDiscovery, it's a sale for the assets -- what were the assets that went along with the sale?

It was basically working capital.

How much working capital went with it?

About $10 million.

So are the net proceeds including -- if we factor in the receivables is it more like $13 million?

If you factor in working capital, yes.

Okay. All right. And with regards to looking towards the next quarter, can you remind us of the seasonality with regards to Asia-Pac, in terms of how much should that come in and then what would be the rebound that we should expect in Q2?

Yes, I mean it's their summertime. I'll actually be there in two weeks, so I'm looking forward to some warm weather.

Nice.

I know. I'll send you a postcard. But we expect them to actually grow, which isn't necessarily the normal seasonal trend there, but I think Asia-Pac will grow in Q4. And then I think the others --

I was referring to Q1.

I'm sorry, Mark. Of 2015?

Right.

Yes. So I mean it's normally down by several million dollars from -- last year we had a very soft Q4 in Asia-Pac, so we expect it will drop off by probably about $3 million from Q4 this year.

Okay. So would you expect that you had hit profitability in Q2? Overall?

Looking for guidance in Q2 2015.

Just looking for the first quarter of profitability.

Yes. Yes, I think we are looking at Q2 at the moment. Obviously, the faster we can get the fee earners productive and the [Alix] savings in and -- all of that will help, Mark, and I think that's all the activities that we are focused on.

Okay. Great. Thank you.

Bill Nasgovitz, Heartland Funds.

Good morning. Congratulations on the sale. I hope you are pleased with the number.

Yes, we are.

Terrific. And it's nice to see year over year, some top-line growth. Just a question in terms of -- how many different continents is Hudson currently operating in?

Three.

I think Australia doesn't belong to Asia. Three regions but it is four continents.

Four continents. Well, for a company our size, just in the theme of increased focus, is the Board management considering perhaps slimming that down the bit in the future?

I think we will always consider, as we've said, to ensure that we are present in the areas where we can achieve profitable growth. I think that, Bill, the issue that you have if you try to focus too much is that then you lose the scale, and it's very difficult to compete without scale. So that's kind of like the two -- balance the two equations in your balancing act that you have to sort out, focus and scale. It's not a simple equation. But we definitely will only stay in the areas that will bring profitable growth for Hudson.

Okay. Well, that's good to hear. But for a company our size it would seem to make sense from a strategic review --

But that exactly what you are saying -- a company our size. But the moment you size -- you start dropping off more businesses, then the size goes down, too, and then -- that's not a issue we will be fighting for.

Okay. And then lastly with cash, the proceeds -- I might have missed this. What might be the uses of our cash balance, going forward?

So clearly that bolsters our cash position, which is good to have, but the only two things we have expressed that will be doing with that cash at this moment is continue to invest on our organic growth in core areas and execute and accelerate the strategic initiatives that we have already mentioned.

Okay. Thank you.

(Operator Instructions). At this time there are no further questions.

Thank you, operator, and thank you everyone for joining Hudson Global's third-quarter conference call. Our call today has been recorded and will be available on the investor section of our website, Hudson.com, later today. Thank you and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.