Hudson Global Inc (HSON) 2015 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hudson Global 2015 third-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to David Kirby.

Please go ahead, sir.

Thank you Stephanie and good morning everyone.

Our call this morning will be led by Chief Executive Officer Stephen Nolan and Chief Financial Officer Patrick Lyons.

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.

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 those materials at this time as they will serve as a helpful reference guide during our call.

As you review our results for the third quarter please remember that we exited a number of businesses in 2015 that are not classified as discontinued operations and thus are part of the prior-period reported results.

We have provided a reconciliation from reported to retained revenue and gross margin in the press release and in the earnings slides and we will refer to both sets of numbers.

Retained revenue and gross margin exclude all businesses sold or exited in the current and prior year.

With that I will turn the call over to Stephen Nolan.

Thank you, David, and good morning everyone.

I'm pleased to report continuing progress in our financial performance.

Third-quarter 2015 reported revenue of $110 million came in at the middle of guidance.

Compared to Q3 last year reported revenue was impacted by a $19 million reduction due to the stronger dollar and a $20 million reduction due to the sale of two businesses earlier this year.

On a retained basis our revenue grew 0.4% in constant currency.

Gross margin was $45 million, up 3% year over year on a retained basis in constant currency.

Gross margin in our recruitment businesses grew 1.4% you're a year with perm growing 5% while temp contracting fell 6%.

RPO gross margin grew 12% while talent management grew 2%.

Reported SG&A costs were $46 million or 5% below last year on a retained basis in constant currency.

At quarter-end we had almost 1,200 fee earners flat to last year and we saw a nice improvement in productivity and leverage in most markets.

Support costs were substantially lower with savings and compensation cost in both corporate and the Americas and ongoing savings in real estate and infrastructure in all geographies.

Third-quarter adjusted EBITDA was a $400,000 loss compared with a $2.9 million loss last year on a reported basis.

The year-on-year improvement in adjusted EBITDA is driven by the progress we're making in all areas with Asia-Pacific up $1.7 million, corporate costs lower by $1.3 million and Europe improved by $400,000 on a reported basis.

While America's reported results are impacted by the divestitures over the last year the underlying business is performing well.

We generated $4.8 million in operating cash flow this quarter of which $3 million related to the collection of the US IT accounts receivable that we retained as part of that sale.

Turning to regional and country performance in the third quarter, America's Q3 reported results now include RPO and related businesses.

The comparison to 2014 is impacted by the sale of IT in June 2015.

Gross margin was flat compared with 2014 as growth with new and existing clients was offset by the end of a large contract at the beginning of this year.

SG&A cost in the business unit were higher than last year due to investments in sales and delivery capabilities.

The results are also impacted by stranded costs that remained after the sale of IT and eDiscovery but these costs were substantially reduced by quarter-end.

Asia-Pacific had a strong third quarter with year-on-year growth in revenue and gross margin of 3% and 13% respectively in constant currency.

Gross margin improvement was driven by our recruitment businesses in Australia and China.

Perm grew 20% and temp contracting grew 8%.

RPO grew 14% led by China and Hong Kong while RPO in Australia saw increased activity levels at existing customers.

Talent management remained soft compared with a very strong 2014 as a number of projects ended.

SG&A was 4% higher due to increased compensation for fee earners.

Adjusted EBITDA in the third quarter was $2.3 million or $1.7 million better than last year.

In Europe we experienced the usual summer slowdown but we did see growth on a year-over-year basis in Belgium and Spain offset by UK and France.

Gross margin from our retained business dropped 7% in constant currency and adjusted EBITDA was $200,000 or $800,000 better than last year on a retained basis.

UK gross margin fell 15% mainly due to weakness in perm primarily in the legal, HR and accounting and finance practices.

We also closed a number of practices, for example oil and gas in Scotland which impacted gross margin.

RPO gross margin grew 18% continuing their growth throughout this year.

Continental Europe delivered gross margin growth of 5% led by an 11% growth in Belgium and 26% growth in Spain offsetting a 10% fall in France.

We recently won two RPO deals in France and we are seeing some progress there.

In recent weeks I spent time in a number of markets.

I was struck by the level of energy and activity in our offices.

We now have a powerful mix of tenured and recently hired leaders and our teams are working together to drive change in how we operate and to deliver improved results.

One example is how our combined Hudson recruitment and talent management product offering are helping to deliver superior service for our clients and candidates.

In addition we continue to invest in our RPO sales and delivery capabilities in all markets and are very pleased to see double-digit growth with new and existing clients.

Having said that we do recognize the macroeconomic concerns in many of our markets but remain focused on driving profitable growth in our core businesses.

To recap on what was a much improved quarterly performance in Asia-Pacific third quarter was the seventh consecutive quarter of year-over-year constant currency gross margin growth.

Our teams in China and Australia delivered strong leverage on the incremental gross margin and significantly improved adjusted EBITDA from a year ago.

In Europe our teams in Belgium and Spain continue to drive strong growth across every business line.

Despite a challenging 12 months in the UK recruitment business we have attracted and retained a very strong team that is getting back on track and I'm confident we will see tangible improvement there in the short term.

In the Americas our RPO focused business is now well positioned for double-digit growth with an excellent customer base and a rightsized cost structure supporting it.

And in corporate we now have a simpler, leaner structure with lower running costs.

I'll now turn over the call to Patrick, our Chief Financial Officer, to review some additional data points from the third quarter as well as our fourth-quarter outlook.

Thank you, Stephen, and good morning everyone.

In the third quarter we incurred $2.3 million in restructuring charges in continuing operations.

The charges mainly related to the elimination of stranded cost in the US following the completion of our transitional support obligation for the businesses we sold as well as real estate actions in the UK and Ireland.

Our stock buyback program started in August and we purchased 262,000 shares in the third quarter at a cost of $700,000.

Through October 29, we purchased an additional 58,000 shares at a cost of $145,000.

Our third-quarter tax provision for continued operations was a tax benefit of $1.6 million.

Stock compensation expense was $200,000 in the quarter.

Capital expenditure was $1.1 million in the third quarter.

We expect between $3 million to $4 million of CapEx for the full year.

We ended the quarter with $36.4 million in cash and $18.6 million in available borrowings, totaling $55 million in liquidity.

We had minimal borrowings on our credit facilities at the end of the quarter.

This week we replaced our Australia and New Zealand credit facility with a new local bank which will provide us with increased availability at a lower cost.

Days sales outstanding or DSO was 48 days, an improvement of two days over last quarter but three days higher than a year ago mainly driven by the growth in our business in China where credit terms are typically longer than what we see in our other major markets.

Looking for the fourth quarter and using our projected exchange rates for the quarter we expect a revenue range of $100 million to $110 million.

Reported fourth-quarter 2014 revenue was $136.7 million which translates to $122.4 million at our estimated FX rates for the fourth quarter.

Adjusting for the businesses we have sold or exited, fourth-quarter 2014 revenue was $104 million at constant rates.

So our fourth-quarter revenue guidance ranges from 4% down to 6% up from prior 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 and gross margin will be up in 2014.

Adjusted EBITDA in the Americas in the fourth quarter will also be held by lower support cost.

In Europe we expect our retained business to be close to flat but improved from recent quarters as the UK stabilizes while the rest of Europe remained steady.

Adjusted EBITDA in the retained business should be improved from prior year just as we saw in the third quarter.

Overall for the fourth quarter we expect adjusted EBITDA of between breakeven and a $1.5 million profit which compares to a reported loss in the fourth quarter of 2014 of $2.4 million with the year-on-year improvement driven by growth in Asia-Pacific and a greater than 30% reduction in corporate costs.

Operator, please open the line for Q&A.

(Operator Instructions) Jeff Silber, BMO Capital.

Hi, good morning, it's Henry Chien calling for Jeff.

I had a question about your 4Q guidance.

What is the, if you can, what is the implied retained revenue growth rate for the quarter?

Do you have that?

From minus 4 to plus 6 on prior year in constant currency on a retained basis, Henry.

Okay, got it.

Just wanted to clarify that.

And in terms of I'm just curious what is driving the gross margin expense that you saw in quarter and I'm assuming also that you expect for next quarter.

Well, we have our mix of business there, Henry, so I think it really depends on where we're seeing growth in perm in Asia-Pacific as well as RPO.

Okay great.

Thanks.

(Operator Instructions) J.D. Padgett, ALMAK Capital.

Hi, good morning guys.

A couple of quick ones.

One, you talk about in the press release that most of the stranded costs of now been eliminated from the business.

But if I'm looking at the guidance right I think that the OpEx is expected to step down in Q4 versus Q3.

Is that just the full-quarter impact of having those expenses out there?

Yes it is, Jamie.

We were working all through the third quarter in the Americas and as we exited into fourth quarter we are at a much lower rate now because we also had a transitional services agreement with Mastech who we sold the IT business to.

What is the impact of that agreement?

It just meant that we have to give transitional services through the third quarter.

When that finished we're now able to so from a real estate perspective as well as actual support cost in the Americas that's at a much, much lower level than when we started the third quarter.

Okay.

And then as we look forward then is the Q4 base a good base to be thinking about into next year?

Yes.

Again you have the seasonality but overall I think for now with these retained businesses we have and a lot of the cost work we've done you're looking at a good starting place.

What's the typical seasonal pattern for your operating expenses?

OpEx, I mean it moves around, in the first quarter we have obviously folks in Australia and Asia on holiday.

So that tends to be a bit lower and then except in Q2 and it drops off again in Q3 when we have the Europeans on holiday.

So I mean it's mostly fixed but there is some variability there depending on those two factors.

Okay and then the business in APAC, how much of that is China versus Australia and New Zealand?

About 30% right now in Asia.

Okay.

30% Asia and then 70% is (multiple speakers)

And the 70% is ANZ.

Okay.

And what's the business climate there, customers there feeling pretty negatively impacted by the recent price changes in the commodity space or do you not really deal with many of the customers that would have exposure there?

So in Australia the whole economy has some tie to the commodities space.

We didn't have a high dependency in Western Australia to that particular practices but it has had an impact for sure.

In China we've been working on diversifying our client base to doing more business with local owned companies.

So we are seeing a broader spread there business than just being focused on some of the larger players.

Okay.

And then another question on UK, what's it take to really get that geography back on track for you guys?

Is it just a matter of allowing some of the recent hires there to mature into the role and drive change?

Yes, that's a big part of it.

We have, I mean two big to businesses in the UK, a very strong business in Scotland which has the people there have been with us a long time.

Again they've had impacts from oil and gas and some of the financial services ups and downs I would say but that's a very good business.

The English business has taken a bit more work but there are some really good people that we've retained and some strong people that we've brought in.

And I think I was there this week and it has a very good feel right now compared to what it was earlier in the year.

Just more optimistic about being able to go out and close business in those kind of things?

Yes, I mean obviously the UK market has been very good so we're disappointed in the sense that we've missed probably some of the opportunities.

There might be a softening there I would say but from what we're seeing in terms of our activity and market activities it just, yes, it feels like it's progress but it does take time.

Get the new people in, get them productive and that's kind of the journey that we're on.

It's taking a bit longer than we had expected or hoped but I had a good visit this week for sure.

Then just one final quick question about share count.

It looks like it was up about 1 million shares quarter over quarter despite some share buyback activity.

I think the stock price was about the same level quarter over quarter.

What caused that?

I think it was I mean it was a new program put in for me which I think impacted that, Jamie, as well as we had the change of controls.

We'll have to see if there is we can give you maybe off-line a better reconciliation.

I don't have it on hand.

Okay.

Thank you guys.

Since December, yes, it's mainly driven by stock compensation.

(Operator Instructions) [Unger Sagger], private investor.

Good morning guys.

The restructuring that you had initiated a few quarters ago, is that fully done or is there something left that is still going on in the fourth quarter?

That program is at this stage it's largely complete.

I do expect there will be some small additional charges in Q4 as we wrap up that program and some of the usual true-up activities.

But compared to Q3 I'd expect that to be a lot less in the fourth quarter and likely less than $1 million.

I see.

Now the fourth-quarter guidance that you provided is definitely better than we have seen from Hudson in a few years.

So congrats for that but going forward to maintain consistent and increased profitability where will that come from?

Do you still expect operating expenses to bring it down or is it just more now growth-centric in your core regions?

I think it's been a bit of a journey, Unger.

I'm here two years, just over two years now and we definitely had to get the cost base right which I think we've made great progress, particularly in the last quarter or two.

But we also had to invest in fee earners.

We had practices that in certain markets where we just didn't have enough people and sometimes outside the leadership or just all sorts of different factors.

So I think the -- we're not giving any guidance on 2016 at this point but our goal as I've said now for the last several quarters was to get to a profitable place by the end of this year with a focus on growing as well as optimizing the costs which for me is more fee earners and lower infrastructure.

I think we've made as I said great progress there and intend to do everything we can to enhance that as we go into next year.

But one option that we're looking at is if we add fee earners in certain markets between now and the end of the year and we will see that SG&A go up in Q1 and the benefit will come later in the year.

So you have to think about it in that context as well that we probably still have some work to do in certain markets to add consultants and business producers.

Great.

So I know you're not providing any guidance for 2016 but just internally do you have any set goal or target to achieve let's say GAAP profitability by what timeframe?

No, no comment at this point on that.

Okay.

All right, thank you.

David Sachs, Hocky Capital.

Good morning.

So if we could talk a little bit about the visibility in 2016 so the RPO and talent management revenue streams.

Maybe you don't want to provide specific numbers but just a sense of how much of 2016 might already be call it in backlog or under contract?

Well on RPO, David as we know there is multiyear contracts that we have there and as always there's new business that we're bringing in.

Some people having had us fix say their hiring choose to go back then to an in-house model.

So we will always have business coming in and out.

And just a bit of color in China, what we're seeing there is a lot of project growth so that's a slightly different model than the multiyear deal.

So it's kind of a somewhat -- it's more of a steady stream than we have in perm for sure.

But most of the clients that we've had or have at the moment will continue into 2016 and new folks that we're bringing online.

Our goal is to retain all the clients we currently have.

So we saw double-digit growth in Q3 and we think it will continue in Q4.

And so it's a mix of finding the projects, signing up new customers, getting them onstream and billing as soon as we can and maintaining obviously as much of the customer base that we have at the moment.

Talent management is -- it's doing very, very well in Belgium and starting to feel like it's more of an opportunity actually in Europe.

A lot of our APAC business is tied to public sector which has is choppy let's say.

So that one was very strong last year, is fine this year but just is -- we're bidding obviously on a lot of different projects in the public sector and that's hard to give a view into next year right now.

Thank you.

(Operator Instructions) J.D. Padgett, AlMAK Capital.

Two quick follow-ups.

Gross margin, what's the typical seasonal pattern that we should expect there?

It doesn't change that much, Jamie.

Within our RPO it tends to be if we have some projects or as some new wins and perm will depend really on the holidays probably is the biggest impact.

So Q1 tends to be a bit softer because of the Asia-Pac holidays.

That's the best color probably.

Is the impact on utilization of the fee earners, that shows up in gross margin, correct?

Well, we see higher gross margin if we have more fee earners.

And then the question is when as we increase productivity that allows leverage into adjusted EBITDA.

So the goal is we have the right number of people who are driving your gross margin, they are paid obviously a base and commission so some of that but really the rest of the cost should be flat and you get more leverage.

So that's really what we saw in the third quarter was a nice improvement in many of the markets on folks that we had hired earlier this year who have now become productive.

So we will continue to invest in fee earners and some of those markets for sure.

But the fee earners they show up within as a set off against gross profit as opposed to in the SG&A.

No, no, no.

Sorry.

They are in SG&A.

Okay.

So what's the cost against gross margin then?

It's mostly our temp contracting book.

So that's where we're paying the temps so we have the revenue and then we include in there the cost.

So perm will come through at 100% gross margin but temp is you can see it it is in the 20%s probably because we're paying the temps.

Okay.

And the fee earners are all in the SG&A?

Yes, correct.

Got you.

Then one other question.

The accrued reorganization expenses that are on the balance sheet, is that expected to be cash and when will you pay that out?

That will largely be paid out over the next probably 18 months.

A lot of it will be in the next 12 months.

Thank you.

(Operator Instructions) David Sachs, Hocky Capital.

Just a quick numbers question.

So in terms if I annualize the third quarter, fourth quarter that suggests the Company is doing somewhere between $400 million and $450 million in revenue, $180 million to $190 million in gross margin.

At the current run rate of corporate expense what would you guesstimate that is sort of exiting 2015 and how much gross margin and/or revenue would that overhead level support?

I'm just trying to think through the marginal contribution of revenue growth which we haven't seen in a while.

So I think on corporate cost, David, our exit rate will be about $10 million annualized.

And that $10 million would support how much above the current level of business before we have to start adding overhead if you will?

Not much.

I mean our goal is to get it, with the simplified structure, get it lower, and then some of that money we know savings does go back into increasing fee earners where we have now leaders and good practices in markets like the UK.

So there will be a short-term hit on that because we may be adding SG&A.

But the gross margin will come and the fixed cost which we've been bringing down our goal, Patrick and mine, is to keep them as low as we can.

And based on what you've discussed on the conference call with double-digit growth in RPO and somewhat positive growth in talent management, those in the third quarter represent 37% of your gross margin mix and they are growing faster than the overall Company and they have the highest margin contribution of your business portfolio.

So that should suggest that the overall margins of the Company even if revenue were to be flat next year should be higher.

Is that the right way to think about it?

Yes.

Look, we've been investing in each of the three main legs but the contracting book of business for us has been good in certain regions, not in others.

If that comes back that would have an impact on that GM and what would fall out.

If things stay as they are and we do we will continue to increase our business and RPO and talent management, yes, that would have a more incremental return on EBITDA.

And your predecessor used to give a multiyear goal of achieving we will call it industry average profitability of 4%, 5%, maybe even higher EBITDA percentage of revenues.

Is that still a realistic expectation for Hudson in the next 24 months to achieve something along those lines based on the cost take-out you've identified and implemented as well as the continued growth in RPO and talent management and hopefully a recovery in these other temp and perm businesses?

Look, David, I think it's two things.

One is absolutely it's a goal and I think with all the noise that we've had this year and we are working now on our budget for next year that I think on our next call we'll have a better view of what we would be able to say there.

But it is absolutely our goal to get to the right return based on the mix of business that we have and so that will continue.

And one last -- if you could just comment on the recent Board addition, the gentleman that you added appears to have quite an attractive background.

Just explain the relationship how you found him and what benefits Hudson might get from his involvement with the Company.

Thanks.

Yes, Ian who I spent time with this week and have met several times is very pleased to have him.

Certainly we wish Dick Stoltz all the best and thank him for his nine years.

It's a network, David, and he just it's someone that we met and we liked and was very excited to join the Hudson Board.

Very experienced and has obviously a global perspective as well which I think is great.

Thanks.

(Operator Instructions) At this time there are no additional questions in queue.

Thank you, Stephanie, and thank you everyone for joining the Hudson Global third-quarter conference call.

Our call today has been recorded and will be available on the investor section of our website Hudson.com shortly.

Thank you and have a great day.

Thank you.

This concludes today's conference.

You may now disconnect.