Hudson Global Inc (HSON) 2015 Q1 法說會逐字稿

Good morning, my name is Arnica and I will be your conference operator today. At this time I'd like to welcome everyone to the Q1 2015 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 first quarter of 2015. 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 forward-looking statements.

These risks are discussed in our Form 8-K filed today and in our other filings made with 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. 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 our earnings materials at this time; they are on the website under Featured Documents and will serve as a helpful reference guide during our speakers' remarks. With that we will turn the call over to Manolo Marquez.

Thank you, David. Thank you all for joining us on our 2015 first-quarter earnings call. As you know, Stephen Nolan will start to lead the Company later this week. I will be very brief in my remarks today and will let him share with you the details of our first-quarter performance and outlook.

As part of our decision to bring a sharp focus to our investments in the areas where we can demonstrate profitable growth, we are also announcing today that we entered into an agreement to divest our IT business in the Americas for $17 million in cash as well as retained working capital and divested our project starting business in the Netherlands for EUR8 million in cash. And we are assisting our operations in four small loss making countries in Europe.

During the first quarter we continued to see constant currency gross margin growth in most of our key markets. Most notably in Asia-Pacific where we made the majority of our investments last year. Overall gross margin growth for Asia-Pacific was 11% in constant currency.

Our China recruitment led the way in that region with a 30% improvement and our full-year recruitment came close growing by 24%. Most importantly, our temporary contracting business began to grow as well in Australia and did so by 16%.

In the Americas, after the divestiture of eDiscovery last year and now our IT business, gross margin for our remaining business in RPO grew by 19%. In continental Europe, Belgium, our largest and most profitable operation, enjoyed gross margin growth of 5% and improved their adjusted EBITDA by over 50%.

Although we still need to restore our growth in the UK, the progress we have made in all our other key markets has been reassuring. In parallel, we have continued to deploy a more efficient organizational model and rationalize our cost base. Just recently we moved our New York Company headquarters from our Lexington Avenue to a much smaller and more affordable space.

Almost two years ago now I was very pleased when Stephen agreed to joined the Company as Chief Financial Officer. Since then he and I have worked in close partnership with the rest of the Company's management team executing our strategy.

As in Stephen's case, we had plenty of outstanding talent from industry-leading peers and promoted many professionals within our ranks. They help us manage the transformation of a highly complex business in a [adverse] international economic environment.

It is in challenging times when people's capabilities and values are utterly tested. I cannot thank our teams enough for the trust, initiative, enthusiasm, dedication and support along the past four years.

And as I give now the floor to Stephen to provide more details on our performance, I wish him and Hudson's many excellent leaders and professionals all the luck and success they deserve in their future achievements.

Thanks, Manolo, and on behalf of everyone on the Hudson team, we thank you for all of your hard work and leadership during the past four years. We wish you, Carmen and family all the very best going forward. It will be an honor to take on the role of Hudson's CEO on May 13.

During my two years with Hudson we have worked to focus on our core businesses to build and retain a talented team that can drive disciplined execution and invest selectively where we have identified opportunities to win.

We have funded these investments through reductions in our general and admin cost base and by exiting or divesting certain non-core practices and markets. Our work continues but we are seeing good progress in many areas. It is critical we maintain our focus on driving profitable growth in our core businesses during these transitions.

Turning to the first-quarter results, revenue came in at the upper end of guidance at $124 million, down 3% year on year in constant currency. Permanent recruitment was up 4%, temp contracting fell 5%, RPO fell 2% in talent management was down 6%.

Gross margin was $48 million, flat year on year in constant currency. RPO gross margin grew 5%, perm recruitment grew 4%, while temp contracting fell 6% mainly due to weakness in the UK and in the US.

SG&A costs were $52 million, 4% higher than last year driven by a 10% increase in fee earner headcount mainly in Asia-Pacific. Related comp costs were $2.4 million in constant currency. Q1 includes a $700,000 accrual for the CEO transition.

We continue to offset our investment in fee earners with savings in real estate and other G&A costs and we expect to see additional progress in the UK and the US.

First-quarter adjusted EBITDA was a $4.3 million loss compared to a $2 million loss last year. Excluding the CEO transition charge, first-quarter adjusted EBITDA was within our guidance range.

Turning to regional and country performance in the first quarter, America's first-quarter gross margin grew 3% compared to last year, RPO continued to perform well with a 19% year-on-year increase in gross margin.

SG&A costs were $1 million higher than last year due to investments in RPO offset by $800,000 in lower support costs. The comparison is impacted by the allocation of $1.3 million to discontinued ops in the first quarter last year. Adjusted EBITDA was $900,000 lower than last year due to the weaker IT results and higher costs.

As Manolo mentioned, we have entered into an agreement with Mastech for the sale of our IT business and we extend our thanks to the US IT team and best wishes going forward with Mastech after we close, which is expected later in second quarter.

Asia-Pacific had a strong first quarter with year-over-year growth in revenue and gross margin [up] 6% and 11% respectively in constant currency. Gross margin improvement was driven by 27% growth in permanent recruitment and 10% growth in contracting.

RPO gross margin fell 6% as we saw lower activity at some of our larger clients but continued progress with projects and new business wins. Adjusted EBITDA in Q1 was $800,000 better than last year due to the better gross margin mix and cost savings.

In the first quarter Australia gross margin grew 4% led by strong perm and contracting results. China gross margin grew 31% led by perm and RPO.

In Europe first-quarter results were mixed with gross margin dropping 9%. Adjusted EBITDA was $1.9 million lower, almost all in the UK. UK revenue was 13% below last year while gross margin fell 18% due to weaker results in perm and temp recruitment.

Year-over-year recruitment gross margin fell 22% mainly due to weakness in the IT and legal practices. We are replacing leadership in both practices in England. RPO gross margin grew 14% as we implemented new business wins.

Continental Europe saw flat year-over-year performance with growth in Belgium and Spain offset by weaker results in France. We sold our Dutch business late last week to management and a local investor and we wish [Arien] and his team the very best of luck with their new venture. In addition we did exit Ukraine, Slovakia, Czech Republic and Luxembourg.

In the first quarter we incurred $1.3 million in restructuring charges and continuing operations, mostly severance and real estate costs in Europe and in the Americas. We saw a year-over-year reduction in support and real estate costs of $2.7 million which was offset by investments in fee earners and stranded costs in the US.

At the end of March we had $5 million of approved restructuring accruals remaining and we continue to aggressively implement cost savings opportunities. We ended the quarter with $14 million in cash and $26 million in available borrowings totaling $40 million in liquidity and no credit facility borrowings.

Use of cash in the quarter was somewhat higher than the normal Q1 seasonality due to higher accounts receivable, payment of bonuses in the markets that met their targets. DSO was 52 days, up from 43 days at the end of December.

A few additional data points from the first quarter. Q1 results included $500,000 of stock compensation, in line with 2014. Our first-quarter tax provision for continuing ops was a $100,000 credit. Capital expenditure was $700,000 and we expect approximately $3 million to $4 million of CapEx during the year.

Looking to the second quarter, we expect our international business will continue to be impacted by weaker currency trends. Our prevailing exchange rates we expect a revenue range of $117 billion to $127 million. Our guidance assumes an average exchange rate of $1.52 to Sterling, $1.11 to the euro and $0.79 to the Australian dollar.

Our reported second-quarter 2014 revenue was $151 million which translates to $132 million at our estimated rates for the second quarter of 2015. If we adjust for businesses we have sold or exited, 2014 Q2 revenue was $122 million at constant rates, so our Q2 2015 revenue guidance ranges from 4% down to 4% up from last year in constant currency.

Regionally we expect Asia-Pacific revenue and adjusted EBITDA will grow year over year in constant currency. America's RPO revenue will be up on 2014, but reported revenue and adjusted EBITDA will be lower.

This is driven by the timing of closing our IT sale, the lack of discontinued operations reporting for this sale, stranded costs following the exit of IT and legal as well as investments in our RPO business. We expect to end 2015 with a run rate in SG&A the Company sustained by the RPO business we have.

In Europe reported revenue is expected to be lower than last year due to no discontinued operations reporting for the businesses we have sold or exited. We expect our retained business to be flat.

Adjusted EBITDA will be lower due to weaker results in the UK. The UK had a very strong first half in 2014, but has struggled in recent months. Trading appears to have stabilized in March and April and our leaders there continue to drive improved performance through selective investment and improving the operating model.

The Rest of Europe is expected to be flat to slightly down compared to Q2 2014 in constant currency as weaker conditions in France should be offset by continued good performances in Belgium and Spain.

Overall for Q2 we expect adjusted EBITDA of between zero and negative $2 million, which compares to a $300,000 loss in Q2 2014 on a constant currency basis. This excludes the impact of the change in control provisions if the Board changes our approved at our shareholder meeting in June, as discussed in our proxy statement.

We are committed to achieving positive adjusted EBITDA during the second half of 2015 and believe the traction we have shown over the last nine months provides a roadmap to achieve this important goal. Arnica, please open the line for Q&A.

(Operator Instructions). [David Sachs], [Hocky Capital].

If you could just give us some approximate sizing for the Netherlands business that you are disposing of.

Sure. In Euros revenue in 2014 was about EUR35 million, about EUR7.5 million of gross margin and EBITDA about EUR1.5 million.

Okay. And the rationale for that was a healthy asset that we disposed of. Just explain the rationale for disposing of that business.

It was -- as we did our study over the last 18 months, David, and I laid out our strategy, we felt that it was a non-core business. It is a very unique business with project solutions, it is got a bench model and it was really limited within the Dutch market unless we decided to invest fairly substantially to grow outside of that core market and we made a choice to invest in different areas.

Okay. And then as far as the balance sheet, you had walked through the sources, or uses in this case, of cash in Q1. Can you just talk about how those might reverse in Q2 or for the balance of this year?

And given your forecast of a modest negative EBITDA in the second quarter and a positive adjusted EBITDA for the second half, how you see the balance sheet evolving with the proceeds coming in from these sales in the second quarter. And then so how you see operating cash generation or usage for the rest of the year? Thanks.

I think we are following our normal, at least the last year or two, David, trend. So we would expect to see probably some use in the second quarter of cash and then to be positive probably as we finish the year.

Jeff Silber, BMO Capital Markets.

I apologize, we dropped off in the middle of the call. So if you talked about this just ignore me. But can you just remind us in terms of what is left by the different regions, maybe at a high level what businesses you are in and are there any other potential assets that might be sold?

Sure, Jeff, it is Stephen. Within Europe our main market is the UK which is very substantial and we will continue to invest there and growth that. We have some excellent leaders that are getting that business back on track. We have a very strong business in Belgium, again recruitment as well as talent management.

France is a good market, but we are struggling with -- in certain areas. And then Spain, a very nice business but small. In Asia PAC really no changes. We remain in Australia, New Zealand, China, Hong Kong and Singapore. And in America's we will just have an RPO business.

And then in terms of the specific verticals that you focus on?

So to start with we have recruitments, so perm and temp. Obviously our strengths there are in IT, finance and the many professional areas. And ARPO which was going very well, it's almost 20% of our gross margin now. And then obviously talent management continues to be a strength as well, almost 15% of our gross margin.

And are you happy in the businesses that you currently have or again would we potentially see more divestitures going forward?

At the moment I would say we are happy with the businesses that we have. But it has been now over the last 12 months a fairly concentrated effort to try to get back to those three core areas. And our goal is to use the funds we have to drive growth in those.

Okay, great. Thanks so much.

(Operator Instructions). David Sachs, Hocky Capital.

Okay, so on the restructuring reserve you had mentioned there was $5 million left at the end of the first quarter. From the release it would appear that you are adding additional restructuring later in the year.

The amounts that were defined by the Alex partner study, when will the full benefit of those restructuring savings hit the financial statements for the Company? And then, is there additional savings that you are targeting and sort of the timeline that you see that being embedded into your results? Thanks.

So, David, I think $5 million is what we had left of the provision that we made last year as we completed the Alex partner study. We will continue to work, as we did in Q1 and into Q2, on finishing off some of the work there. The main focus now I would say is in Europe and in the Americas.

And I think within the scope of the provisions we have we still have enough money to get the restructuring that we need to complete done. So the full value I think will come probably in the second half of this year.

So that is the driver of getting us to EBITDA positive in the second half on a run rate?

I think there is two things. One is, and you will see it, we have an amount of cost now in the US that we have to work down. We also have to get our UK business, which has been (technical difficulty) and really profitable in the past back on track. And I think those two will be the key. Asia-Pacific and Continental Europe are actually in pretty good shape.

Okay. So the -- I am just trying to -- at what point do you think we will have completed the work necessary or identified from Alex partners. And then it sounds like there is incremental savings above that that you are targeting with the indications for the reserves for this year.

Yes, what I would say, David, is we are just about finished with the Alex partners' initiative. So there was a lot of them that we worked on, some we were able to do for less money than we might have assumed initially. We have now more work to do I think in the US and some in Europe.

So I think we -- it never stops. We just wanted people to understand where we stood at this moment in terms of the progress we have made, how much of the provisions we have left and where we are going to focus.

Okay. And if you could just -- we have eliminated a couple of businesses, US IT now the Netherlands. So the run rate that we are achieving in the first half of this year if you meet the midpoint of your guidance puts us at about a $500 million in revenues business.

Is that sort of how you see Hudson on a run rate basis, or do you think the business is smaller, larger and if you could just sort of describe what you see the profit model for this reconfigured portfolio looking like over the next year or two.

I think it is about $500 million based on where we are today. David, with the numbers you have just portrayed. And the gross margin will be I think healthy with the mix of business that we have. And we continue, as we have talked about, to get as much of the general and admin costs out as we can.

So, I think all of those things should get us back to the guidance that we have given initially around mid-single digits profitability.

And healthy -- your parlance for gross margin, that would be North of 38%?

It will be in the range -- it will be around that point, yes, I would say. It will be a bit higher depending on the mix, it depends a lot on our [perm], as you know.

Okay. Well, best of luck in accomplishing that. And it certainly appears that we are in good financial shape with the liquidity in the balance sheet and the proceeds coming in from these last two asset sales will help and thank you.

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

Well, thank you, operator, and thank you all for joining the Hudson Global first-quarter conference call. Our call today has been recorded and will be available on the Investors section of our website, Hudson.com, shortly. Thank you. Have a great day.

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