Hudson Global Inc (HSON) 2018 Q2 法說會逐字稿

Good morning and welcome to the Hudson Global conference call for the second 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 security laws.

Such forward-looking statements involve certain risk and uncertainties that may cause actual results to defer materially from those contained in the forward-looking statements.

These risks are discussed in our Form 8K filed today and in other filings made with Securities and Exchange Commission including our annual report on Form 10K as amended.

The company disclaims any obligations to update any forward-looking statements.

During the course of this call references will be made to non-GAAP terms such as adjusted EBITDA.

An adjusted 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 material at this time as they will serve as a helpful reference to guide during our conference call.

I will now turn the call over to Jeff Eberwein.

Sir, you may begin.

Thank you, Candice and welcome everyone.

We thank you for joining us today.

I'll review the second quarter results and give some perspective on the RPO business, Hudson's corporate costs and trends we see going forward.

Patrick Lyons, our CFO, will then provide some additional details on our second quarter results and review our outlook for 2018.

For the second quarter we reported revenue of $17 million, up 15% year-over-year in constant currency.

Gross margin of $11 million decreased about 1% in constant currency as strong growth in Asia-Pacific and the U.K. was offset by the loss of a large global client in the third quarter of last year that impacted our businesses in Europe and the Americas.

SG&A costs were $11.9 million in the second quarter, which is 10% or $1.1 million above the same period last year.

And this number includes $600,000 of severance.

We reported an adjusted EBITDA loss of $1.1 million compared with positive adjusted EBITDA of $0.1 million a year ago with much of the decrease due to $600,000 of severance expense following the recent divestitures.

Turning to regional and country performance in the second quarter, Americas gross margin was down 22% year-over-year impacted by the large contract that ended in September last year.

Despite that, the region still reported positive adjusted EBITDA of $150,000 down from $400,000 a year ago.

Asia-Pacific once again had an excellent quarter with strong year-on-year growth in revenue up 39% and gross margin up 20% in constant currency.

We saw higher volumes at existing clients and got a boost from a new client win in the fourth quarter of 2017.

In Europe, revenue was up 4% and gross margin was down 11% 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 25%.

While the overall results were mixed in the second quarter compared to last year, our team around the globe remains very focused and very dedicated to serving clients and I want to thank all Hudson employees for their hard work so far in 2018.

We strongly believe this hard work and focus will show up in future results.

So after spending more time with clients, employees and industry people in recent months, I'd like to offer some perspective and an outlook on our RPO business.

Hudson RPO has a very talented and dedicated team of professionals and we serve prestigious, high-quality clients around the world, where talent acquisition and talent management is the key to success.

We do particularly well in sectors where talent is mission critical such as financial services, life sciences, and consumers to name a few.

We are known for quality service and white-color professional hires.

We offer a high-end, high-touch, customized solutions for our clients.

We have strong customer service and receive high marks from clients on our service delivery.

In summary, we are a valued and trusted long-term partner with our clients.

In terms of RPO as an industry, we strongly believe RPO is a fast-growing, high-quality business to be in.

NelsonHall, a leading research firm serving the business services sector forecast the RPO industry to grow 10% to 15% annually over the coming years.

This forecast fits with our view that more and more companies will see the benefit of moving to an RPO solution for their talent needs.

We believe Hudson RPO is well-positioned to participate in these growth trends.

If the RPO industry does indeed grow at 10% to 15% going forward, and we participate in this growth as we should, then our revenue and gross margin should also grow at the same rate and our adjusted EBITDA should grow at an even faster rate.

Now turning to costs, we have been examining and focusing on our cost structure since the divestitures of the legacy recruitment businesses at the end of the first quarter of 2018.

We've made some changes in recent months to reduce our corporate costs and we envision further reductions going forward.

We believe that next year the run rate for corporate cost should be approximately 50% lower than this year if we include severance costs in 2018, or about a third lower if we exclude severance costs.

The picture we're painting is that as RPO's adjusted EBITDA grows, as we believe it will, and corporate costs decline, we should generate positive adjusted EBITDA as a company sometime around the end of year.

And we anticipate being solidly positive on this metric next year.

Turning to stockholder value creation, you should know that the company's board and management team are strongly focused on growing stockholder value over the long-term.

And we believe investing in our RPO business is one of the best ways to achieve this goal.

In the coming quarters we expect to invest in 3 areas in our RPO business: sales, technology, and marketing.

Unlike bricks and mortar businesses that get to capitalize their investments, investment in a people-oriented services business like ours get expensed right away.

The investments we're making in RPO may suppress results somewhat in the short-term but we believe they will drive growth and profitability in the medium-to longer-term.

These investments are minor, not major and we believe they will have quick paybacks.

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

Thank you, Jeff and good morning everyone.

As a reminder, on March 31, 2018, we completed the sale of the recruitment and talent management businesses in Europe and Asia-Pacific in 3 separate transactions and recorded a pre-tax book gain of $14 million related to those sales.

Under U.S. GAAP the divestitures met 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.

I would also highlight that under GAAP any previously shared corporate assets or support team costs do not get allocated proportionally between continuing and discontinuing operations.

But rather the accounting is determined by whether the asset or support costs was included as part of the sale or retained by Hudson.

Under the sale transactions most of the regional support costs and infrastructure in Europe and Asia-Pacific transferred to the buyers and thus such costs are fully reflected in discontinued operations in the historical numbers, which distorts the year-over-year comparison at the EBITDA level.

Our adjusted EBITDA includes $600,000 in severance expense for the second quarter and $2.4 million on a year-to-date basis related to termination of 3 corporate executives following the divestitures.

Our stock buyback remains in place and 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 second quarter tax provisions for continuing operations was a tax charge of $100,000.

We had no capital expenditure in the second quarter.

The company used $3.6 million in cash flow from operations during the second quarter.

The usage -- that usage number included $1.4 million of fees and expenses related to the business divestitures, which were accrued as March 31 but paid in the second quarter.

The cash usage was also impacted by an increase in accounts receivables of $1 million compared to March 2018 reflecting the higher revenue in the quarter.

Day sales standing was 67 days at June, improves from 70 days at March, but still up from 63 days a year ago.

We are seeing some delays in payment related to the transition following the divestitures relating to our sale of new legal entities and we expect the DSO to return to prior year levels as we progress through 2018.

We ended the quarter with $38.6 million in cash and no borrowings.

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

We continue to expect 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 a large global client in September of 2017 that we mentioned on previous calls.

Our outlook on adjusted EBITDA from continuing operations is unchanged and is as follows: we continue to expect RPO operations to deliver between $5 million to $6 million of adjusted EBITDA pre-corporate expenses.

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

The full-year estimate includes the $2.4 million of severance that I mentioned earlier, which is partially offset by expected savings from lower ongoing compensation and professional fees in corporate.

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.

As Jeff mentioned, 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.

Candice, could you now open the line for questions, please?

(Operator Instructions) I'm seeing our first question from Lee Lignos with Rubicon Capital Group.

Just wanted to get your thoughts after, I guess, now that you have a full quarter minus the other businesses, just kind of an update on, I know you've been doing some work on talking to different people within the organization.

Can you just, kind of, give us a sense of what you're seeing, what you're hearing, what you think the opportunity is, I guess for pipeline, and I guess incremental business over the next year or 2?

Sure, we have a robust pipeline.

We just went through, Patrick and I did with each region their outlook and their pipeline and it's pretty exciting.

And we're also working together as a global team better than we ever have before, I believe.

We have a lot of instances where we'll win business with a client in a region and then start to expand that relationship over time to other regions.

And like I mentioned before, we're particularly strong in life sciences, financial services, consumer, and we also do some business in manufacturing industrial technology and we're seeing a lot of hiring growth at our existing clients.

And there's a lot of exciting potential new clients in the pipeline and we have to convert those to sales and we're working very hard on that, but the outlook is bright.

So I guess when you talk about the conflicts of the group and the industry and the company, you're -- I think just to reiterate what you said, you think revenue gross margin should grow 10% to 15% annually?

That's right.

I mean, the industry experts, consultants, forecast RPO as an industry to grow 10% to 15% per year over the coming years.

And so just theoretically, if our market share is constant, we should grow at that same rate and we have a goal, a challenge, a target to grow faster than the market, but that was a an illustration of what our growth should look like if those projections and forecasts pan out.

So you think there's an opportunity to actually grow faster than that with market share gains?

Right, there is that opportunity and we have to execute.

I guess to that point with regards to growing the business it sounds like your preference is to organically grow and bring on new sales people et cetera.

Can you elaborate on that in terms of how much money do you think that would spend as a cost rather roughly?

Sure and just to give some perspective, in the prior company RPO was a small piece of the total.

Let's say, approximately, 15% of global revenues and so RPO, as you might imagine, didn't always get the focus, didn't always get the investment, because it was just a small part of the total.

And now that it's -- we're a standalone business and that's our sole business, we're really focused on it and we're investing in areas that have been under-invested.

And I mentioned the 3 areas: sales, technology, and marketing.

And some of that is to keep up with the market, but it's also to drive that growth potential to where we could potentially grow faster than the market.

And when I said these are minor investments not major investments, it's less than $1 million a year and like I said, they should have quick paybacks.

So if we hire a specialized sales person who's a good hire it's hard to expect a lot of payoff from that investment in that person in the first 6 months, but we should definitely see it in the next 6 months.

And within a year, it should be really -- a real productive investment.

So it sounds like it's really just a couple million dollars here and there just to grow the sales organization and I guess just to modernize the IT and that kind of thing?

Yes I would say, less than $1 million a year.

I guess in the context of growing the business you did mention, and thanks for the color with regards to the corporate costs next year and it sounds like you've got trending in the right direction.

You did mention that you think EBITDA might be able to grow faster than that 10% to 15% target of revenue and gross margin growth.

Can you give me a sense, I guess, as you scale up the business -- and it's my understanding that your business currently is subscale?

What is the margin expansion or, I guess, the normalized margin opportunity for this business?

I mean, you're doing roughly about $70 million, $75 million run rate revenue, what is -- what do you think a normalized margin would be and how much revenue would you have to generate to get to really kind of a full normalized EBITDA margin?

Yes so that is a really great question and we're giving specific guidance for 2018.

And for 2019 and beyond, it's more that we're giving some framework as to how to think about it.

Not really giving specific guidance.

And so my comment was kind of more theoretical and high level in nature.

Just in the sense that we do have variable costs and fixed costs.

And I would say, this is true of any business, that if they have some fixed costs as they get larger and get scale we should see some leverage, because we're effectively allocating those fixed costs over a larger revenue base.

And so it just follows from that that if we're -- that our EBITDA growth rate should be faster than our revenue and gross margin growth rate.

Patrick can you…

Can you give me an order of magnitude, I mean is it like 2x the growth rate of the gross margin?

It's probably not that high.

We do have quite a bit of variable costs in our structure.

At this stage Lee, we don't want to get into providing specific guidance for 2019.

I think we have a little bit more work to do and as we get later in the year and build our strategic plan for 2019, we will be happy to give some more detail on 2019.

But yes, we will be typical in our business that as the business expands, grows, as the top line grows, EBITDA would normally grow faster than the growth rate on revenue and gross margin.

And in addition, in our case as we've emphasized in this call, we are later focused on the corporate costs as well, so that obviously helps to have a higher growth rate on EBITDA compared to the top line.

I guess just putting together the variables that you provided, I am assuming that EBITDA just grows 10% to 15% and corporate costs are cut in half, it's possible that the business can generate at least $3 million next year of EBITDA and probably more and the enterprise value of the business is [$15] million right now.

I'm just really curious given all of that and given the cash balance you have, it doesn't seem that there's a huge outlay of capital that's [you need to] organically grow the business.

Just curious why you haven't been more active in buying back the stock, I noticed that between the 2 quarters you bought 2,200 shares.

I'm just curious what your thoughts are, I know there was a board meeting and I wonder if you had that board meeting and what the conclusion was there.

Sure.

So when I became CEO, which was about 4 months ago, and talked to the board about what our priorities were, we came up with 3 things that are all very important, but the first 2 were more urgent and the first one was to really spend time getting immersed in the RPO business, doing everything we could to help maximize the growth and margins and performance in that business.

And so that's been a big area of focus.

And then second area of focus has been our corporate costs and we have started to make some changes there and more reductions are coming.

And then the third one is also very important, especially over the long-term which is strategy, capital allocation, as you mentioned we do have a cash balance.

And we are coming from an open minded position where all options are on the table to achieve our mission of growing stockholder value over the long-term.

So we will be more articulate on the path forward and a plan in the future.

I will just add one final comment and given the outlook and strategy and there's definitely -- seems like things are turning in the right direction in terms of rightsizing the business that you can parse out, I'm just not sure your stocks going to be $1.65 for much longer, so I would strongly suggest that you consider buying back stock at these levels.

And obviously we got that and I appreciate your time.

Sure.

And we appreciate your interest and your questions and I might have mentioned this before, but I do think it's important to pay attention to what companies do in addition to what they say.

And we did put in place a stock buyback program a few years ago and I think we bought something like $7.5 million approximately on a $10 million plan.

And so we have bought back a sizable amount of stock relative to the size of our company.

(Operator Instructions)

So, Candace I have a an answer to a question that was e-mailed to us.

And we encourage stockholders to e-mail us questions if they like for us to answer on the call.

And the question that was e-mailed to us is, is there a headwind for Hudson in winning new RPO clients because you do not offer a bundled product like many peers?

And the way we would answer that is kind of depends on what one means by a bundled product.

With the traditional recruitment business, we don't see that bundled with RPO and we did not, historically, do a bundled offering with our agency businesses and our RPO business.

And we actually think it's very helpful to be separate from the recruitment businesses because it reduces any conflicts of interest.

And we have a much clearer go-to-market strategy just by being a pure play RPO.

Another thing that people talk about when they talk about bundled products is to combine management of temps in addition to RPO and we do that for our RPO clients.

We don't typically do that temp contract type of work as a standalone business, it's more that we do it as a complement to our RPO business at the request of clients.

And we do have a breakdown of our permanent and temp businesses in our 10Q and also in the earnings slides.

Okay and I'm showing no questions in the queue.

Thank you for joining the…

Okay -- go ahead, Candace.

I am sorry.

Thank you for joining the Hudson Global second quarter conference call.

Today's call has been recorded and will be available on the investor section of our website hudson.com.

You may now disconnect.