Hudson Global's (HSON) CEO Stephen Nolan on Q1 2016 Results - Earnings Call Transcript

| About: Hudson Global, (HSON)

Hudson Global, Inc. (NASDAQ:HSON)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 10:00 AM ET

Executives

David Kirby - IR

Stephen Nolan - CEO

Patrick Lyons - CFO

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Hudson Global First Quarter 2016 Earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]

I would now like to introduce your host for today's conference, Mr. David Kirby. Sir, you may begin.

David Kirby

Thank you, Skyler, and good morning, everyone. Welcome to the Hudson Global conference call for the first quarter of 2016. 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 these materials at this time as they will serve as a helpful reference guide during our call.

As you review our first quarter results, 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 year reported results.

We have provided a reconciliation from reported to retained revenue and gross margin in the press release and earnings slides and we will refer to both sets of numbers during our remarks. Retained revenue and gross margin exclude all businesses sold or exited in 2015 and 2014.

With that, I'll turn the call over to Stephen Nolan.

Stephen Nolan

Thanks, David, and good morning, everyone. I am pleased to report continuing progress in our financial performance. First quarter 2016 reported revenue of $101 million came in at the middle of our guidance and compared to the first quarter last year was impacted by a $6 million reduction due to the stronger dollar and an $18 million reduction due to the sale of two businesses last year.

On a retained basis and constant currency, our revenue was up slightly on 2015. Please note that the first quarter is normally our lowest quarter as there are significant holidays in the Asia-Pacific region.

Gross margin was $41 million, 1% below last year on a retained basis and constant currency. Gross margin in recruitment fell 7% year-on-year with perm 11% down, while temp contracting grew 4%. Gross margin in our recruitment process outsourcing or RPO business grew 19%, while talent management was flat.

SG&A costs were $43 million, 12% below last year in constant currency. At quarter end, we had 1,230 fee earners, up 6% on last year. Support costs were substantially lower both in Corporate and in the Americas.

First quarter adjusted EBITDA was a $2 million loss, compared with a $3.8 million loss last year on a reported basis. The year-on-year improvement on adjusted EBITDA in constant currency was $1.5 million. The improvement was driven by the progress we're making in almost all areas where Americas up $1 million, Europe up $400,000, and corporate costs lower by $1.3 million. Asia-Pacific adjusted EBITDA fell by $1.3 million, with growth in Australia more than offset by weak results in China.

Turning to the regional and country performance in the first quarter, America's first quarter reported results now include RPO and related businesses. The comparison to last year is impacted by the sale of the IT business in June of 2015.

Gross margin was up 18% on 2015 with growth at new and existing clients. SG&A costs were lower as we completed the transition to a more cost effective support structure in the fourth quarter of last year.

Asia-Pacific had a mixed first quarter with year-on-year growth in revenue of 3%. Our gross margin fell 4% in constant currency. Gross margin improved in our recruitment businesses in Australia, New Zealand, and Hong Kong as well as RPO in Australia where we grew at existing clients, some of which was project-driven and new clients as recent lends were implemented.

China recruitment where we had a soft quarter as prevailing market conditions reduced demand, especially in practices which service -- the manufacturing, sales and marketing, and property and construction sectors.

At the regional level, temp contracting grew 12% while perm fell 15%. RPO grew 20% led by Australia. Talent management declined 14% in the first quarter, mainly in Australia where a number of projects ended.

In Europe, we saw a growth on a year-over-year basis in Belgium and Scotland, offset by England, France, and Spain. Gross margin from our retained business was slightly down on 2015.

U.K. gross margin fell 5%, mainly perm for accounting and finance and HR were below last year. RPO gross margin grew 18%, driven by new customers. Continental Europe delivered gross margin growth of 3%, led by 12% growth in Belgium, offsetting a 17% drop in Spain and a 6% drop in France.

Overall, we're encouraged by the progress we are making despite more challenging market conditions. We grew gross margin in seven of our 12 markets, and then the five that declined, several markets have now stabilized, but a couple are experiencing challenging conditions.

Obviously, RPO had a big quarter and it's worth noting on slide nine of the PowerPoint that we put out on the website that RPO gross margin reached almost 25% of our total first quarter gross margin, which compared to 20% a year ago. Perm has dropped to 40% from almost 45% of our gross margin last year.

Along with the growth we are seeing in temp contracting, this clearly impacts our business mix. Now the mix will change a bit each quarter depending on the market and obviously customer demand, but also as we execute on our strategic priorities. While we're focused on growing each piece of our business, we're encouraged to see this more balanced portfolio.

For 2016, we expect to continue growing gross margin in our core markets and to deliver full year profitability at the adjusted EBITDA level to targeted investments and business development as well as higher productivity and focused execution.

I'll now turn the call over to our Chief Financial Officer, Patrick Lyons to review some additional data points from the first quarter as well as our 2016 second quarter outlook.

Patrick Lyons

Thank you, Stephen, and good morning, everyone. Our first quarter adjusted EBITDA loss of $2 million includes $500,000 of legal fees related to the ongoing arbitration with our former Chairman and CEO.

We incurred $600,000 in restructuring charges and continuing operation for the first quarter. The charges included severance in our Asia-Pacific region and real estate actions in the U.K. and France as we continue to opportunistically reduce costs.

We purchased 366,000 shares in the first quarter at a cost of $1 million. From inception of stock buyback program in August 2015 through April the 27th, we have purchased 1.1 million shares at a cost of $2.8 million.

We paid our first dividend on March 25th, 2016 at $0.05 per share for a total amount of $1.7 million. Yesterday, the Board declared our second dividend payable on June 24th, 2016 to shareholders of record as of June 14th.

Our first quarter tax provision for continued operations was a tax benefit of $300,000. Capital expenditure was $600,000 in the first quarter. We expect approximately $2.5 million to $3.5 million of CapEx for 2016.

We ended the quarter with $32 million in cash and $18 million in available borrowings, totaling $50 million in liquidity. We had $5.8 million in borrowings on our credit facilities at the end of the first quarter.

Day sales outstanding or DSO was 52 days, flat to a year ago, but an increase of five days over December 2015 due to the typical seasonal increase we see in the first quarter as well as slower payment by some large clients in China.

Looking through the second quarter and using our projected average exchange rates for the quarter, we expect a revenue range of $105 million to $115 million. Reported second quarter 2015 revenue was $122.7 million, which translates to $170 million at constant FX rates.

Adjusting for the businesses we have sold or exited, second quarter 2015 revenue was $107 million at constant rates. So, our second quarter 2016 revenue guidance ranges from down 2% to up 7% against prior year in constant currency.

Regionally, we expect Asia-Pacific revenue will be above last year in constant currency. We expect to continue to see solid year-over-year growth in RPO in second quarter though not at the levels we saw in quarter one when we had significant additional project work.

In recruitment, we expect to see growth in temporary contracting, offset by weaker perm performance in China. We expect adjusted EBITDA to be lower due to the challenging conditions in China and the impact of growth in temp contracting against slowing perm activity.

We expect the Americas RPO revenue will be similar to the first quarter 2016 and flat to down slightly against last year due to the timing of some contract start and end in 2015. EBITDA should be up from 2015.

In Europe, we expect revenue for our retained business to be approximately flat compared to prior year, but improved from recent quarters as the U.K. starts to improve while the rest of Europe remains steady. Adjusted EBITDA should be improved from prior year just as we saw in the last two quarters.

In total for the second quarter, we expect positive adjusted EBITDA, up between $500,000 and $2 million, which compares to our reported loss of less than $100,000 a year ago.

We expect the year-on-year improvement in adjusted EBITDA to be driven by Europe, the Americas, Australia, as well as lower corporate cost offset in part by the weakness noted in China.

This outlook excludes any potential cost related to the ongoing arbitration with our former chairman and CEO. We expect that the decision on this claim will be issued by the arbitrator during the second quarter of 2016.

Skyler, can you please open the line now for questions?

Question-and-Answer Session

Operator

And I'm not showing any questions at this time.

David Kirby

Well, thank you, Skyler. Thank you, everyone, for joining Hudson Global's first quarter conference call. Our call today has been recorded and will be available on the Investor section of our website, hudson.com. If we don't have any questions on the queue, we will conclude the call at this time.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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