Hudson Global Inc (HSON) 2019 Q2 法說會逐字稿

Good morning, and welcome to Hudson Global Conference Call for the Second Quarter 2019.

Our call this morning will be led by our Chief Executive Officer, Jeff Eberwein; and VP of Finance, Matthew Diamond.

Please be advised that the statements made during the presentation include forward-looking statements under applicable security law.

Such forward-looking statements involve certain risk 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 our other filings made with the Securities and Exchange Commission, including our annual report on Form 10-K.

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 quarterly slides, both posted on our website hudsonrpo.com.

I encourage you to access our earnings material at this time.

As they will serve as a helpful reference guide during our call.

I will turn the call over to Jeff Eberwein.

Thank you, operator, and welcome, everyone.

We thank you for your interest in Hudson Global and for joining us today.

I'll start by reviewing the second quarter 2019 highlights; Matt Diamond, our VP of Finance, will then provide some additional details on our second quarter 2019 results.

I will then give some perspective on our RPO business, Hudson's corporate costs and review the outlook for 2019.

In the second quarter of 2019, we reported revenue of $26.4 million, up 60% year-over-year in constant currency.

Gross profit of $11.7 million increased 13% year-over-year in constant currency as we saw strong growth throughout our businesses in Asia, Europe and the Americas.

SG&A costs were $12 million in the second quarter, up 7% versus the same period last year in constant currency.

We reported an adjusted EBITDA loss of $300,000 compared to an adjusted EBITDA loss of $1.1 million a year ago.

Q2 2019 adjusted EBITDA includes $700,000 of nonrecurring expenses compared to $600,000 of nonrecurring expenses in Q2 2018.

Importantly, we generated positive adjusted EBITDA in Q2 2019, excluding these nonrecurring expenses, a watershed event for our company.

I want to thank all our highly dedicated employees for their hard work so far this year.

It is beginning to show through in our operating results.

We believe our business has strong momentum, and we're excited about continuing to improve our operating and financial results going forward.

During the quarter, I met with many clients and employees in the Asia Pacific region and was impressed with the satisfaction of our clients, the robustness of our sales pipeline as well as our market position and reputation in that region.

Earlier this year, market experts ranked Hudson RPO among the very top RPO providers in APAC.

We have an incredibly strong presence in Australia and China and a growing presence in Southeast Asia via our Singapore base of operations.

Turning to regional performance for the quarter.

Our Asia Pacific business had very strong year-on-year growth and revenue, up 87%, while gross profit declined 1% in constant currency.

The revenue growth was driven by the commencement of a large MSP contract in Australia as discussed on last quarter's call.

Gross profit growth in Q2 was particularly strong in Hong Kong and Singapore with gross profit overall in Asia growing 38%, driven by new client wins and strong results at existing clients.

The gross profit growth in Asia was offset by that of Australia, which was down 10% year-over-year due to weaker volumes at existing clients.

The Americas had a very strong quarter with gross profit increasing 23% year-over-year, driven by new client wins, including a new relationship with the Global Industrials company, which performed well in Q2.

Adjusted EBITDA of $600,000 increased from adjusted EBITDA of $100,000 a year ago.

Our Europe business also had a good quarter with gross profit up 37% in constant currency.

The growth was driven by both the U.K. and Continental Europe with strong results in our businesses in Switzerland and Belgium.

I'll now turn the call over to Matt Diamond, our VP of Finance, to review some additional financial details from the second quarter.

Thank you, Jeff.

Good morning, everyone.

Our second quarter tax provision from continuing operations was $100,000.

The company used $1.5 million in cash flow from operations during the second quarter.

This was due to increases in working capital needed to support revenue growth as well as the nonrecurring items in corporate costs that Jeff mentioned earlier.

In addition, the company spent $230,000 in the quarter on the repurchase of 16,000 shares.

Days sales outstanding was 45 days at June, well improved from DSO of 69 days that we had at June 2018.

We ended the quarter with $29.1 million in cash and restricted cash.

In April, we finalized a new credit facility in Australia to support the expected growth in working capital needs as a result of new client wins in that market, but we had nothing drawn on this facility at the end of Q2.

I'll now turn the call back over to Jeff to give some more perspective on our RPO business, Hudson's corporate costs and to review our outlook for 2019.

Thank you, Matt.

We are encouraged by our second quarter results and the momentum our business is building.

We had 2 significant new client relationships ramp up in Q2.

The first was an RPO relationship with the Global Industrials company in the Americas and the other a large MSP contract in Australia where we're managing the contingent workforce for a large Asia-based tech company as a household name.

We are excited to continue to partner with clients such as these where we hope to exceed expectations and then expand our presence within their organizations.

Our team is seeing great success with our land-and-expand strategy and are excited about increasing our business with existing clients, while also adding new client relationships.

Turning to Hudson's corporate cost.

Immediately following the closing of the divestitures at the end of the first quarter of 2018, management reviewed the company's corporate cost on a line-by-line basis and began to rightsize these costs for the new business model.

We believe the run rate for corporate cost in 2019 should be approximately $4 million, excluding nonrecurring items.

This is about 50% lower than 2018's level including severance cost or about 1/3 lower excluding severance costs.

This reduction should not impact our operating business.

In the second quarter of 2019, the company's corporate costs included severance expense of $400,000 as well as nonrecurring professional fees for legal and proxy-related items of $300,000.

Year-to-date, the company's corporate cost include $900,000 of nonrecurring expenses.

In the second quarter and first half of 2018, nonrecurring expenses in the company's corporate costs included severance expense of $600,000 and $2.4 million respectively.

Importantly, excluding these nonrecurring expenses, Hudson Global generated positive adjusted EBITDA in Q2 2019, which is a watershed event for our company.

Turning to our stock buyback program.

We continue to view share repurchases as an extremely attractive use of capital and we expect to continue to be aggressive in repurchasing shares going forward.

During the second quarter, we repurchased 16,000 shares for $230,000.

Since the inception of this program, the third quarter of 2015, through the end of the second quarter of 2019 the company has purchased 405,000 shares for $8 million.

After the current $10 million authorization is completed, we expect to approve a new share repurchase authorization.

In addition to accelerate buyback activity at these attractive stock price levels, the company completed a tender offer in March 2019 for 247,000 shares of the company's common stock for an aggregate cost of $3.7 million, excluding fees and expenses related to the tender offer.

Turning to our outlook for 2019.

We continue to expect to see greater than 10% growth in gross profit over the prior year in constant currency, while revenue growth far exceeds this rate due to the new MSP project that started in Australia in April.

Due to the operating leverage in the business, adjusted EBITDA before corporate cost is expected to grow faster than this rate.

Given this growth in the RPO business and the reduction in corporate cost that we mentioned earlier, we expect the company to generate positive adjusted EBITDA in 2019 at the total company level and particularly so in the second half of the year.

We believe investors should focus on our gross profit line in addition to our revenue line.

The reason for this is that we had a large MSP contract go live in April, in Australia, which we alluded to earlier.

Contracting-type projects like this one inflate revenues due to labor cost pass-throughs.

Since the payroll cost of the contingent workforce and MSP projects are accounted for above the gross profit line, their gross profit margins are much lower than for RPO recruiting projects where the delivery costs are mainly below the gross profit line.

Including MSP in our service offering is an important part of being a total talent solutions provider and also positions us well to win new RPO business in the future, both with this new client as well as other potential new clients.

We believe another key metric to focus on is adjusted EBITDA before corporate costs as a percentage of gross profit.

Over the long term, we're targeting 20% for this metric and mid-teens adjusted EBITDA on the gross profit margins after corporate costs.

Operator, can you please open the line for questions.

(Operator Instructions) Our first question comes from the line of Josh Vogel with Sidoti & Company.

I guess to start, you're doing obviously a great job adding new clients.

I was wondering if you could talk to your sales and marketing efforts of late, maybe how you're sourcing these opportunities.

And also what investments you're making internally?

And what you plan to do on this front over the second half?

I guess when we're looking at a perspective of if you need to add personnel and perhaps where we should think about that geographically?

Yes.

Good questions.

So we did start last year investing in people and technology.

We did increase our investment in sales and marketing, and we're beginning to see some fruits of that investment.

So new clients come to us through our network, through our sales efforts, even sometimes through our website.

But it really just has to do with being in the flow of what's going on in the market, having really good relationships with the management teams of our clients and just being positioned to win business with them when they're ready for it.

And we're -- on the people front, so not only sales and marketing, we're also investing in learning and development in our team, and we get really good remarks from clients on the quality of our team and our solutions delivery.

There was a survey earlier this year that ranked us #1 in the industry in terms of our client delivery capabilities.

So I would say we've made that investment over the last 12 months, we're starting to see some fruits of that investment but we're not ramping up the investment from here.

We're more harvesting the benefits of investments that have been made.

That's helpful.

When we think about the recent client wins to date, notably the ones you highlighted on the Q1 call and as well as the call today, understanding it's still very early, I was just curious how the ramps went?

And are they performing in the early, going up to your expectations?

Yes.

Good -- again, good question.

We -- client ramps often are slower than what they tell us they're going to be and slower than we hope or expect some time.

And definitely, in Q1 we had a ramp phase where we had to put cost in front of the revenues and the ramp was slower, so like the Industrials plant in the Americas, it was really supposed to ramp in Q1.

It was really slow in Q1 but then they had a really good ramp, really good increase in Q2.

So that really helped the Americas business in Q2 and that project is continuing to go well.

Somewhat similar comment for the MSP project in April.

It did start April 1 as planned.

Our team worked really hard to meet that April 1 start date and it's gone really well so far.

I would say the ramp was a little slower than we were expecting or hoping.

But the relationship is incredibly strong and we're already in discussions about more things we can do for that client, which is exactly what we hope to achieve by taking that MSP project that started April 1. So I think that relationship will just get deeper and better over time and that's what we mean by land and expand.

Our team does a really good job once we have a foot in the door with the client, we typically do a good job of getting more business, getting more divisions, getting more regions.

And so we're more aggressively attacking the market and doing whatever it takes to get a foot in the door with the new client.

That's great.

Okay.

Based on your commentary, surprised to see you saw decent growth in the U.K. I was wondering if you could talk to this a little bit and what the dialogue is there with the clients as they can -- as everyone continues to wait and see how Brexit plays out.

Yes.

Another quick question.

Everyone is talking about Brexit, highly focused on Brexit.

We haven't -- so definitely clients are reticent to make huge headcount reductions, but we've had some new client wins, which have been really helpful.

And I would say the new client wins overwhelmed any weakness that we had in other clients.

But there's a lot of talk about Brexit.

It's definitely caused hiring to be slower than it otherwise would be, but we also haven't seen any examples of things falling off a cliff or a client saying they're going to hire x number and it ends up being a fraction of that.

I got you.

Okay.

I guess on the flip side a little bit, you've mentioned lower volume at existing clients in Australia and I'm just curious was that across the bulk of the client base?

Or was it a few select accounts?

And is it, maybe, indicative of something macro going on within the region?

Yes.

Good question.

So -- in Australia, we're really strong in Financial Services.

We're very, very strong in Pharma.

And then we have a new sector that just started in 2018 doing government projects.

So we definitely saw lower volumes in Financial Services, which I do think is maybe due to some macro factors, slowdown in Asia, slowdown in China.

That said, and Financial Services, they are starting to benefit depending on which company it is from lower interest rates.

So the Central Bank in Australia lowered rates twice in the second quarter, I believe, and commercial banking activity is up, mortgages are up, refinancings are up.

It's more the transactional capital markets activity what was down, those kind of roles were down in the first half of the year, particularly in the second quarter.

Pharma was very, very strong for us in Q2, so -- in Australia.

So they haven't seen any hiccup at all as you might expect because Pharma's not so cyclical and not so tied to the economy.

And then the government sector we had a really large project last year that ended in Q2, we have more projects in the queue that we have won or in the process of winning.

So this is a really important sector for us.

It's going to be a sector, I think, we'll just get bigger and better in.

But the nature of government projects is it tends to be project oriented, department oriented, you typically will do a project and then move on to the next department or the next project as opposed to like a Pharma client who is going to hire 500 people a year, year in, year out, just the government sector works differently.

So long way to answer to your question but the Q2 weakness in Australia was Financial Services and government, but Pharma did well.

There's very helpful.

If I could just sneak in one more I guess.

Staying I guess in the macro theme, I'm curious what the dialogue is with clients today worldwide?

What's top of mind to them, are they more focused on finding the talent?

Or are they turning more attention to retaining their existing employees?

I'm just curious what you're seeing and hearing from existing clients as well as prospects?

Yes.

Both are really important.

Unemployment -- despite economic uncertainty, unemployment rates are low all around the world and that's true in the U.S., the U.K., Australia, Hong Kong and our -- there is a war for talent and we do our best -- we're the best fit for professional roles.

So Financial Services, Pharma, are 2 great examples where talent is everything to their business.

If they don't hire the right people, then their business doesn't perform.

It's a very different partnership than filling in more factory type of roles or nonprofessional roles.

So our clients are highly focused on procuring the right talent and also retaining the right talent.

So both are really important, so everyone's kind of watching and waiting, and you do have macro uncertainty out there.

But in terms of their day-to-day operations, things are tight.

It's -- they need all the help they can get, procuring and retaining the top talent.

And our next question comes from the line of Eric Miller with Heartland Advisors.

Jeff, congratulations on all the progress.

Actually, Josh stole my question, so I'm good but thanks a lot.

(Operator Instructions) Our next question comes from the line of [Mark Bishop], he's a private investor.

Can you hear me?

Yes.

Yes.

Good.

I wondered, did you say that there was a project that rolled off second quarter in Australia?

And did you say that there were new ones starting?

And when would those start?

And secondly I was wondering about in -- whether you've seen any impact in Hong Kong with all the situation there?

Or if there's any positive or negative impact from -- or if you have any business in other Asian countries, including other parts of China and ones outside of China?

Were there any ones using your types of services or you're exploring that out or what the outlook is in -- so in Hong Kong and China and in other areas outside of Australia?

And...

Sure.

Sure.

Yes.

Let me take a stab at that and if I don't fully answer your question, you can follow up.

So in China, we're particularly strong in pharmaceuticals and that is a growing business in China and it doesn't seem so tied to the economy or seems cyclical.

We hire a lot of sales roles in particular, it's a strength of ours in China.

So we haven't seen weakness there.

In Hong Kong, we're closely monitoring that situation.

Q2 was good in Hong Kong and what we find about Hong Kong is that, yes, they do work for clients in Hong Kong but many of the businesses that we serve in Hong Kong, they are really operating in 10 to 15 countries throughout Asia and it's -- Hong Kong is the hub.

And so a lot of the hiring managers and teams that we work with and a lot of our clients, yes, they're based in Hong Kong.

Yes, they do hiring in Hong Kong.

But we're really helping them across all of Asia.

And then we have an emerging presence that we're very excited about in Singapore and Southeast Asia.

That's been an area of focus of ours over the last year and we are starting to see some good traction there, some good wins there, starting from a small base.

But we're very excited about Singapore and Southeast Asia as a growth focus going forward.

And on the government work I was referring to, we had a big government project in Australia that ended in Q2 of last year.

We have subsequently won additional projects that were smaller and it just tends to be very project-oriented work, we continue to win new business.

I was just trying to make the point that it's lumpy, much lumpier say than a pharmaceutical company that hires -- I mean some of our pharmaceutical companies in Australia, China, hire 500 people year in, year out or 1,000 people year in, year out.

And it's very steady Eddie type of work.

And I was just pointing that other sectors like Financial Services and government tend to be more lumpy.

Okay.

Great.

On your -- I was wondering if you could comment on the prospects or your progress in finding acquisition targets?

Sure.

Yes.

Good question.

So we are -- we have a very high bar for doing something.

And we have started to look and it's got to be something that is just really, really compelling that adds something to our existing portfolio, our existing company.

Our main area of focus is internal investments like what I've talked about with sales, marketing and technology.

And we are looking at bolt-on acquisition opportunities but it's got to be something really unique and special where we can strongly make the case that, that target inside of our company, we could double or triple their business because it would be part of Hudson RPO.

So it's got to bring something really special and unique, a geography we're not in, a sector we're not in, some sort of technology expertise maybe that we don't have.

We're not looking to get bigger just to get bigger.

Okay.

Great.

Sounds like you may not have anything this year but you're looking, just starting off.

Yes.

We'll see.

Just in general, I would say, sellers' expectations are higher than they used to be.

So a, we have to find something that's really compelling and makes a lot of sense, and is very accretive.

But b, takes a willing buyer and a willing seller and you have to agree on a reasonable price and reasonable framework.

So we're not going to go crazy.

We strongly believe in the walk, run, sprint philosophy.

And so if we do something it's likely to be small, see how it goes and then we can think about doing a second one.

Okay.

Great.

And then the last thing is on the buyback, you did a little bit this quarter, is there -- given what you've already done this year, is there some way to think about the limit on how much you can do without losing your NOLs?

Yes.

Good question.

So we -- for many year -- well, for some time now have had a purchase plan in place, a 10b-5, we take advantage of the 10b-5 exemption.

So we have a plan that's on autopilot that just buys in the market every day and there's all these complicated rules about how much volume can be bought and even time of day, uptick, there are complicated set of rules that the trader has to follow there.

So we're in the market, buying every day.

We think our stock is very attractively valued, so we think it's a really good use of capital to buy back stock and shrink the share count over time.

And then we'll be opportunistic.

So earlier this year, we decided to do a tender offer for up to 10% of our shares.

And it was about close to 80% subscribed and so that was a onetime sizable reduction in our share count that's on top of the ongoing buyback plan that we have that's on autopilot.

Okay.

Great.

So is there any way you can quantify how much you would be allowed to buy under that program or does it depend on the market volume?

Or it's too difficult to figure out?

Well, what I would say is that we're in the market every day.

There are restrictions, volume and price and time of day restrictions.

So each day is different.

But the strongest statement I would make is that we think our stock is very attractively valued.

We've been buying stock.

We have significantly reduced the share count over time.

And we have a $10 million share repurchase authorization in place and we've done $8 million on that plan.

So we are working towards completing that plan and we fully expect to initiate a new plan when the current plan is completed.

And we have a follow-up question from the line of Josh Vogel with Sidoti & Company.

You actually just hit up a bunch of my questions on the buy buck and acquisition pipeline.

So I just -- maybe a quick one for Matt.

Seeing the drop in the DSOs sequentially in year-over-year, I was just wondering is that a function of the MSP contract?

Are you -- can you just talk to why that declined the way it did?

Yes.

No.

I wouldn't say it's a function of MSP, I would say that it's a concentrated effort for us to improve on collection times in certain markets, I don't want to get into the markets too much, but there was a focus to try to reduce it.

And we were cognizant of that this was an area where we can work on and make some progress and I think we've made a lot of progress since -- like I said, since Q4 and since Q1 as well, there was a significant reduction in Q1.

I believe it were around 64.

So getting down to a 45 is a big win for us, and it's definitely due to AR collection efforts.

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

And I would like to turn the conference back over to Mr. Jeff Eberwein for any further remarks.

Well, thank you, everyone, for joining the call today.

Thank you for interest in the company, and we look forward to further progress on our efforts to grow the company, grow our earnings and cash flow from our RPO business and further reductions in corporate costs.

So we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for joining the Hudson Global second quarter conference call.

Today's call has been recorded and will be available on the Investors section of our website, hudsonrpo.com.

This does conclude today's program, and you may all disconnect.

Everyone, have a great day.