Hudson Global's (HSON) CEO Stephen Nolan on Q2 2016 Results - Earnings Call Transcript

| About: Hudson Global, (HSON)

Hudson Global Inc. (NASDAQ:HSON)

Q2 2016 Earnings Conference Call

July 28, 2016 10:00 AM ET

Executives

David Kirby - Investor Relations

Stephen Nolan - Chief Executive Officer

Patrick Lyons - Chief Financial Officer

Analysts

Morris Ajzenman - Griffin Securities

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Hudson Global Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow 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, Tamara and good morning everyone. Welcome to the Hudson Global conference call for the second 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.

The 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. Reconciliation is included in our earnings release and on our quarterly slides both posted on our website 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 second quarter results, please remember that we did exit 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 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. Retained revenue and gross margin exclude all businesses sold or exited in 2014 and 2015.

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

Stephen Nolan

Thank you, David and good morning everyone and thank you for joining us today. Before we begin the update on our business performance in the second quarter, I wanted to start by thanking all our collogues around the world for their hard work and dedication in delivering excellent service to our clients across our RPO, Talent Management and Recruitment businesses.

Earlier this month I visited our teams in the UK, Belgium, France and China and I continue to be amazed, I’m proud to hear about the quality of our service and the innovative and professional solutions our talented collogues, both tenured and recently hired are delivering every day to our clients.

On the flight home from Shanghai, I was reflecting on Hudson’s transformation journey and the progress being made by our teams in each region. Our RPO and Talent Management businesses are growing nicely and many of our key markets are performing well in a simpler more cost effective structure. Of course there are a few challenges we’re dealing with too, but it is worth noting that over the past 12 months Hudson’s adjusted EBITDA would have been positive if you back out the arbitration settlement.

For the second quarter we reported revenue of $113 million which is at the upper end of our guidance, compared to the Q2 revenue last year, we saw a $5 million reduction due to the stronger dollar and $9 million reduction due to the sale of two businesses in 2015. So on a retained basis and constant currency, our revenue was up 4% from 2015.

Gross margin was $47 million, up almost 1% on last year on a retained basis and constant currency. Gross margin in our recruitment business fell 4.5% year-on-year with perm 7% down, while temp contracting grew 2%. Gross margin in our recruitment process outsourcing or RPO business grew 4%, while talent management grew 16%.

SG&A costs were $48 million, which included $2.5 million in costs relating to the settlement of the arbitration with the previous CEO. Excluding this matter, SG&A was 8% below last year in constant currency. At quarter end, we had 1,230 fee earners, up 4% on last year and slapped to Q1. Support costs were substantially lower in Corporate and in the Americas.

We reported an adjusted EBITDA loss of $700,000, which included the $2.5 million of arbitration costs. Excluding these costs, our underlying results was well ahead of the breakeven results a year ago. The improvement was driven by the progress we're making in almost all areas with Europe up $1.2 million, Australia/New Zealand up $800,000, Americas up $200,000 and corporate costs lower by $1.1 million. Asia adjusted EBITDA fell by $1.5 million, with weak results across the region.

Turning to regional and country performance in the second quarter, America's Q2 reported results now include RPO and related businesses. The comparison to last year is impacted by the sale of IT business in June of 2015.

On a retained basis gross margin was down 8%, due to the ending of one large project in Q2 last year, which was mostly offset by growth elsewhere in the business. SG&A costs were lower as we completed the transition to a more cost effective support structure at the end of 2015.

Asia-Pacific had a mixed second quarter with year-on-year growth in revenue of 13%, while gross margin fell 2% in constant currency. We saw a strong gross margin growth in our recruitment businesses in Australia and New Zealand, as well as RPO in Australia. Talent Management gross margin grew across the region.

Our Recruitment and RPO businesses in China had another soft quarter as we dealt with tougher market conditions and some internal challenges. Our business there grew very rapidly over the last few years and we’ve hit some growing pains. During my recent visit, I had good discussions with our talented leaders and I’m confident that we have a plan to leverage our strong presence and brand in China as we focus aggressively on the market opportunities and also disciplined execution.

At the regional level, temp contracting grew 14%, while perm fell 13%. RPO grew 10% led by Australia, with weaker results in both China and Hong Kong.

In Europe, we saw a growth on a year-over-year basis in Belgium, France and Spain, offset by weaker results in the UK. Overall gross margin from our retained business was up 5% from 2015, with RPO up 12% driven mainly by new clients.

In the UK, gross margin fell 10%, with weaker results in Scotland’s temp contracting as a number of large projects ended, but perm did grow. In England, temp was flat year-on-year, while perm remained weak as we saw lower activity in a number of practices mainly accounting and finance and supply chain, where we had changes in leadership.

We did see some impact on perm particularly in June from the EU referendum as clients delayed hiring decision. Our Talent Management business in the UK, which is still quite small, but it’s gaining momentum with increased focus.

Continental Europe delivered strong gross margin growth across all markets with 19%, Belgium up 19%, France up 23% and Spain up 11%.

Looking at our performance in the first six months of 2016 on a retained basis and constant currency, we grew revenue by 2.3%. Gross margin was flat with growth in Americas, Europe and Australia/New Zealand offset by Asia. RPO was up 11%, Talent Management up 8%, temp contracting up 3%, offset by perm down 9%.

Our gross margin split in the first half was 40% for perm and approximately 20% each for RPO, Talent Management and temp contracting. As I noted last quarter, this mix will change each quarter depending on the market and also client demand, but also as we execute our strategic priorities. While we’re focused on growing each piece of the business, we are encouraged to see this more balanced portfolio.

Excluding the arbitration settlement, our first half adjusted EBITDA would have been positive and over $3 million better than the first half of 2015. Again, I’m very grateful for the teams’ contribution and dedication to Hudson’s commitment to profitable growth. For 2016, we expect continued progress in our core markets and practices and to deliver full year profitability at the adjusted EBITDA level.

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

Patrick Lyons

Thank you, Stephen, and good morning, everyone. We incurred 100,000 in restructuring charges in continuing operations in the second quarter, mainly from certain fractions in France and Asia Pacific. We purchased 582,000 of Hudson shares in the second quarter at a cost of 1.4 million. From the inception the stock buyback program in August 2015 through July 27, we have purchased 1.7 million shares at a cost of 4.2 million.

Our second quarter tax provision for continuing operation was a tax charge of 800,000. Capital expenditure was 600,000 in the second quarter. We expect approximately 2 million to 3 million of CapEx for 2016. We ended the quarter with 25 million in cash and 20 million in available barrowings, totaling 45 in liquidity. We had 7 million in borrowings on our credit facility at the end of the second quarter, all in Australia as we funded our growth in temp contracting.

Day sales outstanding or DSO was 49 days, down one day compared to last year and 3 days lower compared to March this year.

Looking to the third quarter and using our projected average exchange rates for the quarter, we expect the revenue range of 105 million to 115 million. Reported third quarter 2015 revenue was 110 million, which translates to 105 million at constant FX rates. Our third quarter 2016 revenue guidance ranges from flat to plus 9% 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.

Regionally, we expect Asia-Pacific revenue will be above last year in constant currency, with solid year-over-year growth in temp contracting, somewhat offset by weaker perm performance in Asia. We expect adjusted EBITDA to be lower due to conditions in China and the impact of growth in temp contracting against slowing perm activity.

We expect Americas RPO revenue will return to growth in Q3 with positive momentum at existing and new clients. Adjusted EBITDA should be up in 2015. In Europe, we expect revenue and adjusted EBITDA to be lower than prior year due to continued difficult trading conditions in the UK.

It is too early to say how the results of the Brexit vote will impact our second half results, but we’re taking a business as usual approach in the short-term.

In total for the third quarter, we expect adjusted EBITDA of between 500,000 loss and 1million profit, which compares to a reported loss of 200,000 a year ago. We expect the year-on-year improvement in adjusted EBITDA to be driven by the Americas, Australia as well as lower corporate cost, offsetted part by the weakness noted in the UK and China.

I would also note that Q3 is the seasonally weak quarter for us in continental Europe due to summer holidays.

Operator, please open the line for Q&A

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Morris Ajzenman with Griffin Securities. Your line is now open.

Morris Ajzenman

Hi, guys. Looking at this quarter, I think you said there’s 2.5 million arbitration charge and I looked at your - I guess your operating income and looking at it here again, you had a loss of 2.4 million. Is it fair to - I’m just trying to look at this on the GAAP basis at this point here, am I missing something, were you close to breakeven on the operating income basis? And then going forward, how do we see GAAP earnings and then you can talk about cash flow for quarter going forward, how does that play out? Now the business is kind of under control and expenses - I presume really better under control, how does that play out? First, discuss this quarter then going forward.

Stephen Nolan

Hey Morris, thank you for the questions and this is Stephen. You’re right with the analysis, I think when you move adjusted EBITDA and take out the depreciation on the wheel [ph], with the 2.5 million we were basically breakeven in the second quarter, so yes. I think part of what we see now is, obviously, we had been doing some restructuring in the past and that’s now at a much lower level and obviously that would help I think to a positive operating income. The SG&A base, we’ve obviously been investing in the S, the selling cost and trying to reduce as much as possible of the G&A, whether it’s in support or in real estate’s or in other IT, all those sort of areas have been sharp focus for us.

The key now is for us to try and get the people that we have - or talented sort of people on the front desk to grow gross margin and to be productive. And I think that’s really been the main focus for us, we’re not going to be adding as many people, the goal is to retain, get them productive and to grow the gross margin, while keeping a sharp eye on the G&A cost in particular. So that’s really our short term outlook at the moment, obviously there are other things going on outside of our control. For example, in the UK with some of the delays we’re seeing now on hiring, that’s just going to make the second half a bit more painful than we might have hoped for.

Morris Ajzenman

Now, if you reach the 115 million in the third quarter top line, would you be in the black on an operating income basis? And then secondly, I don’t have - excuse me not yet, but how are you on a cash generation basis after the CapEx, how is that playing out and how do you see that playing out going forward?

Stephen Nolan

So I think what we see happening in the revenue is obviously a bit of a mix change, right. So we see really good growth now in temp contracting in Australia and New Zealand, which we’re very happy to have that mix in a healthier place. It’s hard to be dependent on perm, RPO and Talent Management again, longer-term deals growing. So I think the revenue of the 115, it will be - some of it is dependent on how that mix works out and the impact on profitability. So at the moment we’re guiding from the small loss to a positive, so hitting those numbers. To answer your question directly, yes, we should be right around breakeven.

In terms of the cash, we - after the CapEx, I think we will be probably close to breakeven in the third quarter. Normally we see tough seasonality in the first half and then stronger cash generation as we finish the year, so Q4 for us is definitely a very strong quarter in cash generation. Q3 this year should be close to let’s say, small burn or a small cash generation.

Morris Ajzenman

Thank you.

Stephen Nolan

Thank you.

Operator

Thank you. [Operator Instructions] And I'm not showing any questions at this time. I’ll like to turn the conference back over to Mr. David Kirby, for any final remarks.

David Kirby

Thank you, Tamara. And thank you all for joining us today on Hudson Global's second quarter conference call. Our call today has been recorded and will be available on the Investor section of our website, hudson.com. Thank you, have a great day.

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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