Hudson Global Inc (HSON) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Hudson Global Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the conference over to your host for today, David Kirby.

You may begin.

Thank you, Sonya, and good morning, everyone.

Welcome to the Hudson Global Conference Call for the First Quarter of 2018.

Our call this morning will be led by Chief Executive Officer, Jeff Eberwein; 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 adjusted EBITDA.

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

Feel free to access these materials during the call to serve as a helpful reference guide.

With that, I will turn the call over to Jeff Eberwein.

Thank you, David, and welcome, everyone.

Thank you for joining us today.

I'll review the first quarter results, give some background on my new role with the company and some perspective on the RPO business.

Then Patrick will provide some details on our divestitures, some first quarter bookkeeping and review our outlook for 2018.

For the first quarter, we reported revenue of $16 million, up 11% versus Q1 2017 in constant currency.

Gross margin of $10 million declined 2.5% as strong growth in Asia Pacific and the U.K. was offset by the loss of a global client in the third quarter of 2017.

SG&A costs were $12.3 million, 17% or 1.8 above -- $1.8 million above last year, primarily due to $1.8 million in severance expense related to the resignation of the former CEO.

In Q1, we reported an adjusted EBITDA loss of $2.2 million compared with adjusted EBITDA loss of $0.2 million a year ago, with the increase mostly due to the severance expense.

Turning to the regional and country performance in the first quarter.

Americas gross margin was down 19%, impacted by a large contract that ended in September of last year.

Despite that, adjusted EBITDA was $400,000, ahead of the prior year by 11%.

Asia Pacific once again had an excellent quarter with strong year-on-year growth in revenue up 35% and gross margin up 14% in constant currency.

We saw higher volumes at existing clients and got a boost from a new client win in Q4 2017.

In Europe, revenue was down 2%, and gross margin was down 6% in constant currency, impacted by the same global client departure noted in the Americas.

This offset strong gross margin growth in the U.K., which was up 21%.

While the results were slightly choppy in the first quarter, our team around the globe remains focused and dedicated to serving clients, and I want to thank all Hudson employees for their hard work so far in 2018.

Also, I want to take a moment to update you on my change into the CEO role, and I'll offer some perspective on the RPO business as well.

As many of you know, I have been on Hudson's Board of Directors since 2014 and served as Chairman of the Board since 2015, so I'm very familiar with the company.

Since becoming Hudson's CEO at the beginning of April, I've had a busy first month, meeting with our leadership and team members, spending time with clients in all 3 of our regional geographies and deepening my knowledge of the company and the RPO industry.

From these travels, I can say that we have excellent clients and employees, and morale is high.

I'm excited to be in this role and about our opportunities ahead, and believe we are poised for growth.

I look forward to continuing to work closely with our global leaders, developing strong client relationships, driving growth in our RPO business and aggressively improving our cost structure and delivering improved performance going forward.

Since I joined the board in 2014, the company has made a number of changes with a strong focus on the stockholders in an effort to enhance stockholder rights and stockholder value.

We have made numerous shareholder-friendly corporate governance changes, initiated a stock repurchase plan, bought $7.4 million out of a $10 million authorization, we have sold noncore businesses to concentrate our resources on the businesses with the strongest growth and margin potential.

Importantly, our most recent divestitures were equity deals, rather than asset deals.

Meaning, we shed all debt, real estate leases, employment contracts and other liabilities associated with those businesses, simplifying the remaining company.

Going forward, we'll continue to execute on the strategy that is in place, which is to drive top line growth, improve our margins and raise the value of the company.

And I welcome your feedback in this process.

So why RPO?

We are excited about focusing directly on RPO because we believe it is a really good business for a few reasons.

The RPO industry is expected to grow over 10% a year over the next 5 years.

RPO adds significant value to clients.

It results in better outcomes at lower prices than traditional recruitment methods.

Our teams are often embedded on site with clients, understand their business and their hiring needs, which enables us to deliver the right candidates and improve the hiring process for mission-critical employees, which means we deliver a very specialized customized service rather than a commodity.

RPO has multiyear contracts, often 3 years, with a high client retention rate.

RPO is now our only business and sole focus after being 1 of 4 different business lines before the divestitures.

And as a result, this business has the exclusive focus of the board and management.

Hudson RPO has a unique position in the marketplace.

We are known for quality, white collar, higher-end, high-touch, customized solutions.

This gives us the benefits of a boutique firm but the breadth of a large global player.

We also have strong customer service with high marks from clients, good delivery and are trusted by our clients.

Our team members are very good at what they do and often have high tenure in the industry as well as with our clients.

In the RPO marketplace, we don't aspire to be the largest.

We aspire to be the best in our segments, and we are particularly strong in financial services, life sciences and consumer products.

I'll now turn the call over to our Chief Financial Officer, Patrick Lyons, to review some additional data points from the first quarter and talk about our outlook in 2018.

Thank you, Jeff, and good morning, everyone.

On March 31, we completed the sale of the recruitment and talent management businesses in Europe and Asia Pacific in 3 separate transactions.

We received $39 million in gross sale proceeds on closing, including $24.8 million for the Benelux businesses, $7.7 million for the rest of the European businesses and $6.4 million for the Asia Pacific businesses.

As part of the sale, the buyers assumed $17.6 million of bank debt as well as $9.5 million of cash and restricted cash.

We have transaction cost of $1.4 million related to the deals.

We recorded a pretax book gain of $14 million in the first quarter related to the sales.

Under U.S. GAAP, the divestitures meet the criteria for treatment of discontinued operations and are now reported as such in our statement of operations and balance sheet for all periods presented.

Therefore, in our Q1 reporting, the results from continuing operations represent only our retained RPO business.

I would also highlight that under GAAP, any previously shared corporate assets or supporting costs do not get allocated between continuing and discontinued operations, but rather the accounting is determined by whether the assets or support costs was included as part of the sale or retained by Hudson.

Under the sales transactions, most of the regional support costs and infrastructure in Europe and Asia Pacific transferred to the buyers.

And thus, such costs are reflected in discontinued operations in the historical numbers, distorting the year-over-year comparison at EBITDA level.

Our adjusted EBITDA for the first quarter includes $1.8 million in severance expense related to the resignation of Hudson's former Chief Executive Officer.

Our stock buyback remains in place, but we made no purchases during the first quarter.

From inception of the stock buyback program in August 2015, we have purchased 3.6 million shares at a cost of $7.4 million.

Our first quarter tax provision from continuing operations was a tax charge of $200,000.

Capital expenditure was $300,000 in the first quarter, all of which was related to the divested businesses.

The company used $14.7 million in cash flow from operations during the first quarter compared to $8.9 million in the first quarter of 2017, though both these numbers include divested recruitment and talent management businesses.

The usage was driven by the normal Q1 seasonal factors we see in the industry each year.

In addition, the increase over Q1 2017 was driven by the top line growth in the businesses sold and the retained RPO business, the payout of 2017 annual bonuses and professional fees we incurred as part of the sales transactions.

Days sales outstanding were 70 days, up from 60 a year ago.

We are seeing some delays in payment related to the transition following the divestitures and expect the DSOs return to the 60s as we progress through 2018.

We ended the quarter with $42.9 million in cash.

Our credit facilities in Australia and U.K. were both tied to the recruitment businesses that we sold at the end of the first quarter.

And those facilities and the associated borrowings were assumed by the buyers.

As a result, Hudson had no borrowings at the end of the first quarter.

We are currently in discussions with various lenders about the establishment of new credit facilities for the RPO business.

While we are not providing quarterly guidance at this time, we did want to provide you with an update on our 2018 outlook.

In terms of the top line, we expect to continue to see double-digit growth in revenue over prior year in constant currency during 2018.

At the gross margin level, we expect positive growth in gross margin against prior year in constant currency during 2018.

This factors in the loss of the double client in September 2017 that we mentioned earlier.

Our outlook on adjusted EBITDA from continuing operations is as follows: we continue to expect RPO operations delivered between $5 million to $6 million of adjusted EBITDA precorporate expenses.

We now expect corporate costs of approximately $8 million to $8.5 million in 2018.

The full year estimate includes the $1.8 million of severance for the former CEO recorded in Q1, which is partially offset by expected savings of over $1 million from lower ongoing compensation and professional fees.

As a result, adjusted EBITDA from continuing operations is expected to be a loss of between $2 million to $3.5 million for the full year 2018.

We expect that the growth in RPO and lower corporate costs will position us for profitable adjusted EBITDA in 2019 as we transition this year to become a pure play RPO provider with a new simplified operating platform.

Operator, can you please open the line for questions?

(Operator Instructions) And I'm showing no questions at this time.

I would now like to turn the call back over to David Kirby for any closing remarks.

Thank you, operator.

You can watch the queue in case there are questions.

We can stick it up a moment here.

But thank you all for joining the first quarter conference call for Hudson Global.

Our call today has been recorded and will be available on the Investors section of our website at hudson.com.

And operator, if there are no further questions -- no questions at this time, we can...

I do have question showing up this time from [Inkar Sagar] of BY Capital.

Wanted to -- had a couple of questions.

One, I think you're probably being asked about this quite a lot by other investors as well.

As to how you plan to use that cash going forward?

Has the board decided?

Or will be -- will that come up in the upcoming board meeting as to how do you plan to use the cash?

I mean...

That's a good question.

This is Jeff Eberwein.

The board does review that every board meeting.

And it is a very important item for stockholder value.

And what we have said is that we're going to invest in the RPO business.

We are going to reduce our operating costs, and sometimes it costs money to save money.

We're going to continue our stock repurchase program.

And as we've pointed out, we put in place an authorization of $10 million, and we have bought $7.4 million so far under that stock repurchase program.

And then, there could be some other general corporate purposes.

I see.

So Jeff, that's a fair use of cash.

What do you think, when you look at it, I mean, you could repurchase the stock, and you have -- the company has bought some -- quite a good chunk of stock recently.

And there was a dividend -- quarterly dividend that was instated as well.

But if you look at the stock, where it is, I feel like the company is still devalued with about $42 million of cash as of today.

Where the market cap sits, it's still not a fair value for the business.

As you -- it's a choice between investing into the business or doing repurchase or -- do you think that the RPO business can produce double-digit growth going forward if you were to invest into that business?

Yes, I do think the RPO business can have double-digit growth.

And we're going to look at all options to create stockholder value, maximize stockholder value.

And we could end up doing both of those things, investing in the business and buying back stock.

I see.

And it's -- can you comment on the pipeline for that business this year?

I mean, it's -- with the RPO business, I assume, if there was a single project [being] it's a fairly large project, in most cases, can you comment on the pipeline as to where -- how it is right now at this point?

Yes.

We have a very robust pipeline.

We haven't put out any specifics on that, but I've met with our team leaders in each region and gone through the pipeline in detail, and it's a pretty exciting list.

And as we pointed out, we did have a large client that rolled off in the third quarter of 2017, which happens sometimes.

But there's some pretty interesting growth going on under the surface.

U.K. had a really good growth in Q1.

And we're excited about the pipeline.

It's just a matter of converting it to actual sales, so it's the key.

Okay.

One last one.

I mean, you guided on the adjusted EBITDA level for '18 and somewhat '19, but how about the cash flow?

I mean, does the business -- will be free cash flow?

Generate free cash flow?

No, we wouldn't expect free cash flow in 2018.

I would say, generally, we would expect the cash flow from operations to track fairly closely to the adjusted EBITDA, except we will have some investment in working capital.

We do see, as we mentioned, a continued double-digit growth in this business as we go through 2018.

So that will also mean some additional investment in working capital, as those businesses continue to grow.

I see.

Can you provide some idea on how much cash do you plan to use or where you would be at the end of the year?

I mean, some ballpark figure?

We're not going to provide any specific cash guidance at this point for the end of the year.

It is just too far out, particularly when you consider we are in the process of just finalizing some significant transactions and establishing RPO as its own stand-alone business and migrating to stand-alone systems during 2018.

So at this point, we don't want to give specific cash guidance on the cash at the end of 2018.

(Operator Instructions) Our next question comes from Lee Lignos of Rubicon.

I'll keep it brief, and I think you answered a lot of the questions from the last guy.

But I guess, my first question is with regards to the corporate expenses.

I know that, that level of corporate expense is supporting larger organization.

I guess, what are the opportunities that -- to bring that down?

I guess, that's the first question.

Second question is, can you just give us a sense kind of longer term, like what's the big-picture story here?

What's your plan in terms of growing the business?

It sounds like your preference is to allocate capital to M&A and to grow the business that you currently have.

But if we look out a couple years, what's kind of the board and your vision in terms of revenue and margin for a business like this?

Yes.

Those are really good questions.

First off, on the corporate costs, our guidance for this year is $8 million to $8.5 million, and that does include $1.8 million of severance.

And so you're right, a lot of the corporate costs are left over from supporting a larger organization, and we're going through all the line items.

And we will be looking for ways to reduce cost.

As a smaller company, there's a lot of things, a lot of categories where the costs should come down, audit, legal, there's other things like that.

And what I think you'll see over the course of the year is that as corporate costs come down, it not -- might not be a perfectly smooth line, but on a quarterly basis, those should decline over time.

Also, we have some TSA arrangements, transition services agreements, where we are being supported by the legacy businesses that we sold.

So that's mainly IT but some other things as well.

And those TSA arrangements roll off as the year progresses.

And so as those roll off and we go to our own systems, we think there'll be some savings there.

And on your second question about what is the vision and what should the company look like in a couple of years, I think about that every day, and the board thinks about that every day, and we talk about it every board meeting.

And for now, one thing that we would say is we're open to any and all ideas to maximize stockholder value, and that is the driver behind everything that we do.

I personally own a decent amount of stock.

We do really like the RPO business.

We went through a long process of selling off what we thought were noncore businesses to focus on the core.

And the RPO business is starting off a small base and is expected to grow as an industry over 10% a year for the next 5 years.

And we think we're well positioned to take advantage of that growth and participate in that growth.

Okay.

Great.

And I guess, just one follow-up.

I look at the business today, trading at ex corporate -- or let's take corporate out of the equation, but it's really only trading at 3x EBITDA, right?

As you grow the business and, I guess, it becomes more apparent to investors, what publicly traded comparables should we kind of look to in terms to a fair comp for that RPO business?

Yes, that's another really good question.

So the short version is that there is no perfect comp.

RPO is a fairly new industry.

I don't think it even existed 25 years ago.

And as far as we know, we're the only publicly traded, pure play RPO company.

Many of the other RPO companies are owned by private equity firms or they are divisions of much bigger companies.

And so you could look at the multiple of those bigger companies, but it might not be very meaningful because RPO is a small part of their total.

Probably the most relevant data points to look at, and there's not very many of them, are sales of the businesses.

We had 1 this week where a private equity firm based in New York City sold AMS for a pretty healthy purchase price to the pension fund of Ontario.

Okay.

What -- do you have a sense of what kind of EBITDA multiple was it?

Was it like 8 to 10 or something like that?

I don't have those numbers.

I didn't publicly disclose them.

Well, I think it's fair to assume that it went for more than 3x EBITDA, right?

I would hope so.

And I'm showing no further questions at this time.

I would now like to turn the call back over to Mr. Kirby for any further remarks.

Thank you, operator.

As I said earlier, the call today has been recorded, and it will be available on our website at hudson.com later today.

We appreciate everyone joining the call today.

Thank you very much.

Have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.