Hudson Global, Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hudson Q1 2013 Earnings Call. [Operator Instructions] Mr. David Kirby, you may begin your conference.

[David Kirby:]

Thank you, Amy, and good morning, everyone. Welcome to the Hudson Global Conference Call for the First Quarter of 2013. Our call this morning will be led by Chairman and Chief Executive Officer, Manolo Marquez; and Executive Vice President and Chief Financial Officer, Mary Jane Raymond. At this time, I will read the Safe Harbor statement. 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, including statements regarding the company's strategic direction, prospects and future results. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which we operate, risks associated with competition, seasonality and the other risks discussed in our filings made with the SEC. These forward-looking statements speak only as of today. The company assumes no obligation, and expressly disclaims any obligation, to review or confirm the analysts' estimates or expectations or to update any forward-looking statements, whether as the result of new information, future events or otherwise. During the course of this 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, hudson.com. I encourage you to access those documents at this time. They are posted on our website under Featured Documents and will serve as a helpful reference guide during our speakers' remarks. With that, I will turn the call over to Manolo.

[Manuel Marquez Dorsch:]

Thank you, David. Good morning, everyone. Earlier today, we released results for the first quarter of 2013. Compared to the year-ago period, revenue declined by 17%, and gross margin by 23%. During the quarter, we delivered an adjusted EBITDA of minus $4.9 million. While these numbers were within the range of our guidance, we certainly are not satisfied with declines of that magnitude or a negative quarterly EBITDA performance. Unfortunately, our market conditions continue to be harsh, impacting the entire industry, including key competitors that are also suffering declines in their businesses, most particularly in Australia and Continental Europe. We only embarked on our strategy to optimize our operations and activate the synergies of our global platform in mid-2011. Our business can succeed in good conditions, but it's not yet fully equipped to effectively withstand a tough economic environment. But we also know that when the global economy rebounds, our industry rebounds as well. During the first quarter of 2009, in the aftermath of the global financial crisis, our permanent placement gross margin dropped by almost 60%, and yet when the economy improved in 2010 and 2011, we also enjoyed several quarters of near 40% year-over-year growth in our permanent placement business. Despite last year's challenges, our total gross margin was only down 5% during the 2-year period from 2010 to 2012. And while we are disappointed with our current quarterly performance, we are pleased that in less than 2 years, we have made substantial progress in the execution of our strategy. This will eventually make the company more resilient to the kind of conditions we're facing today. When I first addressed you after our second quarter in 2011, I shared with you the 4 key initiatives that would allow us to make major inroads on our strategy to position Hudson as a world-class global provider of talent solutions, delivering the highest quality of service to our clients and candidates. Our first strategic initiative encompass efforts to align our business units globally and capitalize on our best practices across borders. We established global practices to focus on Legal eDiscovery and RPO. Gross margin from these practices has increased 13% and over 50%, respectively, since 2010, despite the ups and downs in the economy. In the first quarter of 2013, they together represented 24% of our total gross margin, up from 15% 2 years ago. We simplified our operating platform, organizing into 3 regions, America, Asia Pacific and Europe, to better coordinate our global activities, utilize our resources more efficiently and align our operations with those of our multinational clients. Multi-country client relationships now represent meaningful revenue in each of our key markets. And we have worked hard to realize efficiency improvements and added effectiveness through the establishment of cross-border shared service centers and back-office consolidation. These efforts have generated $3 million in annual savings to date. However, our work in shared services is at an early stage. Once completed, a full shared service operation will bring our SG&A more in line with our industry benchmarks. Our second initiative included actions to improve the capabilities, engagement and productivity of our people. With mild economic headwinds in 2011, we grew gross margin by 18%, and achieved the highest income from continuing operations in the company's history. In 2012, when the economy weakened, we responded swiftly, accelerating our transformation to protect our early success and improving our ability to withstand poor market conditions. We created a leaner structure, consolidated offices and lowered costs in our most expensive global properties. In total, we reduced our annualized 2012 SG&A by almost $29 million in constant currency from 2010. During this quarter, these actions enabled us to offset $13 million of the $17 million year-over-year gross margin decline from the first quarter of 2012, including 7% decline in occupancy cost from a year ago. Importantly, we combined this reduction in cost and headcount with the launch of a comprehensive suite of people programs to engage and motivate our employees, provide them the training they need and create highly productive work environment. 87% of our people participated in the annual employee survey conducted by an independent consulting firm. In spite of the restructuring and challenging conditions, 80% of them were identified as engaged or nearly engaged, increasing slightly year-over-year. Going forward, we need to remain focused on preserving and improving productivity levels. To this end, we are concentrating efforts in retaining key staff, as well as ensuring we continue to attract strong, experienced talent from our industry. Our third initiative redirected our efforts to critical jobs and higher added value talent solutions. We have won numerous awards for the quality of the work do. We once again made the RPO Bakers Dozen as a leading global provider of RPO services, moving up in the rankings in 2011 and 2012. We earned the award for the best executive and talent search company in Belgium. We received the Best of Staffing award in the Americas from Inavero for a third consecutive year. And we have continued investing in our state-of-the-art R&D tools and talent management business to meet the growing need for more sophisticated assessment and development services. With annual gross margin close to $40 million, our Talent Management business has shown substantial strength. Still, we need to integrate our development tools into our recruitment and selection business to make Talent Management a true competitive advantage for Hudson. Finally, our fourth initiative address the delivery of the compelling digital presence through the Web and social networks to leverage the possibilities these channels offer for our clients and candidates. We have advanced our use of technology to deliver better service, provide differentiation and realize additional efficiencies. We integrated our client databases to allow for access to and sharing of information on our activity with all clients around the globe, including work we are doing, divisions we work with and consultants handling each assignment. We have launched 26 websites in 12 languages that are generating hundreds of qualified leads. Our RPO business, in particular, has benefited meaningfully from the Web client leads generated. And we have embedded social media capabilities throughout all our organization, engaging all our consultant and recruiters in an extensive LinkedIn training on business and candidate developments to that service. Still, critical to our future success will be the globalization and advancement of our front office technology platform to facilitate the capture and sharing of in-depth knowledge of our clients, candidates and assignments. So we have completed much of the difficult foundational work in less than 2 years. This will ultimately allow us to better withstand economic down cycles and serve as an engine for superior performance in the future. Yet we still have critical work to do to enhance our short-term revenue-generation capabilities from a now more aligned and efficient company. There are still no signs of a solid economic recovery on the near-term horizon. We realized and we will continue to face challenges during 2013. We will stay laser-focused on improving our financial performance as quickly as possible and we will continue to drive our strategy to ensure that we achieve our long-term vision for the business. As we move through 2013, we will first work to protect and grow our revenues, namely, by attracting, engaging and retaining the best talents, investing in other value capabilities and services and expanding client relationships and service models globally. And secondly, we will push harder to gain performance improvements on productivity, namely, by improving our operating efficiency and quality of service delivery, advancing shared services and lower cost operating structures and ensuring appropriate liquidity to endure the market downturn. I would like to thank once more the investors who have been with us over the years and our reiterate our commitment to create a successful, powerful and highly valued company in Hudson. With that, I will now turn the presentation over to Mary Jane, who will provide further details on our first quarter results.

[Mary Jane Raymond:]

Thank you, Manolo, and thanks to all of you for joining us this morning. Turning to the specifics of the quarter. You have from our press release our reported results. They show that all regions are experiencing downward shifts in demand, so let me provide some of the details to give you color on that. First of all, overall, our clients worldwide are focusing on controlling costs as a major routine business practice. This is an important defense in these economic conditions that, as the phrase on Bloomberg goes, are described as a state of certain uncertainty. Some of the main areas that clients are not growing are the management and support roles in corporate; namely, those professional roles in IT, legal, finance, HR and general management. These type of roles can be seen as more or less important depending on exactly the client conditions but this is where our recruitment business has historically been focused because these tend to be the majority of professional roles. We had expected clients to become more and more efficient in their support ranks more gradually, but without strong demand, clients continue to revise their business models and we need to be nimble and adapt to that ongoing change. That said, this is exactly why it's important for us to grow our RPO, Legal eDiscovery and Talent Management businesses. It is also why better positioning with clients is important and those are the important, relevant aspects of the strategy points that Manolo went through earlier. RPO, for example, gives us greater access to the client leaders and gives us the chance to see how client business strategies are evolving. And that in turn, improves our overall effectiveness with respect to recruitment and selection. In addition, RPO assignments expose us to a wider variety of roles. In fact, it's from our experience in RPO that we have advanced our capability in front office roles. Our strategy to grow Talent Management includes making advancements in the tools both for selection, but also for development. The development suite of tools provides us more opportunities to work with clients even when they're not hiring. And all of these offerings just keep us closer to clients and position us to better identify complex roles and some of the more intangible aspects of Fit. So turning to the Americas region. Revenue in the first quarter declined 18% and gross margin declined 31%. This result was very similar to the fourth quarter. At the gross margin level, 25% of the decline is from unprofitable businesses that we elected to exit last year in IT and finance and accounting. Another 25% was in RPO with the remainder in Legal eDiscovery. Consistent with the fourth quarter, we saw lower levels of activity in RPO, driven by a few major clients who significantly reduced their expansion plans. The wire of gross margin decline when compared to revenue is due to the mix effect of lower perm placements and that is where the RPO businesses and the businesses that we exited last year are concentrated. In our RPO and Legal eDiscovery businesses, we've looked into the lower levels of activity that we've been experiencing and have put in place some changes with our sales approach that we believe will counteract these trends. Our restructuring program and other cost-reduction efforts offset 83% of the $3.7 million gross margin decline or $3.1 million. This resulted in a small EBITDA loss of $350,000. In Asia Pacific, in constant currency, revenue in the first quarter declined 24% and gross margin declined 26%. For the quarter, the majority of the revenue decline was in temporary contracting in Australia. However, at the gross margin level, the decline in permanent placement had the most significant effect. Part of the issue in Asia-Pac is that so much of our business has been focused on multinationals, particularly in China. We've talked in past quarters about our ability to find unique people for our clients across our company and certainly throughout the Asia-Pac region. We're able to find, for example in China, people who are multilingual, able to take on management roles and who thrive in large companies often with matrix management organizations. This has been and continues to be a huge strength for us, but the demand is evolving. The growth is stronger outside the major cities and is moving beyond the more senior roles. The fall in the China PMI and the government's intention to invest in infrastructure underscores the rebalancing going on between domestic and international activity. And so this further requires us to penetrate our existing multinational clients as they expand within China, and begin to work with select local clients. Our leadership in Asia-Pac has put in place some very targeted business development goals that we believe will continue to leverage the strengths we have. Of the $7.6 million constant currency decline in gross margin in the quarter, almost 70% was offset by our restructuring program and other related cost reductions. Adjusted EBITDA was also close to breakeven at a loss of $400,000. In Europe, also in constant currency, the revenue declined 10% and the gross margin declined 15%. This year was also similar to the fourth quarter. The revenue decline in Europe was proportional over temp, perm, and Talent Management. The temporary contracting decline was largely in the U.K., and most of the declines in perm and Talent Management were in Continental Europe. At the gross margin level, half of the permanent placement decline in Continental Europe was in France. You will see that we have a restructuring charge in Europe in this quarter, as we expected to have. We are working to narrow our focus in France and reset our economic model there to help regain a healthier position in Continental Europe, but we do feel this could take several quarters given the general business conditions prevailing. Of the $5 million constant currency decline in gross margin, 70% was offset by our restructuring programs and related actions. The European market delivered close to breakeven results for the first quarter at a loss of $100,000 of the adjusted EBITDA level. A few other points, in the anticipation of some of your questions, our restructuring charge of $2 million in the quarter was nearly all for France, with a small compliment in other Continental European countries. We still expect about $4 million for the year, and about $1 million in the second quarter, though we will look to complete as many actions as we can. Our Q1 results included $700,000 of stock compensation compared to $900,000 a year ago. As you may remember, we mentioned last quarter, the 2013 management grant will be allotted in May, as opposed to our traditional February timing, and this timing differences is part of what reduced this year's first quarter cost. The full year cost for equity this year is expected to be about $2.5 million. Our tax benefit in the quarter was pretty small, about $177,000. For the year, we're working on about a 35% tax rate. Our DSO was 51 days, improving 2 days from the same period last year, but deteriorating 4 days from last quarter, the quarter ended December 31. CapEx spending in the quarter was $950,000 and we expect the full year CapEx to be between $6 million and $8 million. We ended the quarter with $33 million in cash and $37 million in available borrowings, totaling $70 million in liquidity. We used $3.8 million in operating cash flow during the quarter with no borrowing on our revolvers worldwide. This decline in liquidity from Q4 to Q1 is broadly typical of our seasonality, even when we compare to years with a similar relatively low level of bonus payout. I want to take a moment and just remind you how our global credit facilities are organized. In the summer of 2010, we split our single major facility into 2 different facilities, one for the U.S. and the U.K., and one for ANZ. In Q1, about 40% of our availability came from the U.S. and U.K. facility with RBS. And another 40% came from our ANZ facility with Westpac Bank. The remaining 20% came from smaller facilities in Continental Europe and Asia. The majority of this availability can grow with revenue and receivables. We are very confident in our ability to fund the company effectively, both in good and bad economic conditions, with the capital structure we have in place now. Let me turn to our guidance. We expect the second quarter revenue to be between $170 million and $180 million, a decline of 12% to 17% at prevailing exchange rates. We expect adjusted EBITDA will range from negative $2 million to positive $1 million. The operating actions and investments that we have put in place are focused on top line performance. They are the most important things we can do to begin to turn the tide on our revenue now with the foundational elements we have built. We will work hard during the second quarter to achieve our guidance with the goal for the management team of delivering breakeven adjusted EBITDA. All of the good foundational progress that we have made has raised the readiness of our people around the world to deal in the markets that we have with us today and to work with our clients to help them win. With that, I'll open the line for questions. Operator?

[Operator:]

[Operator Instructions] We have no questions at this time.

[David Kirby:]

We'll pause another minute to see if there are any questions, operator. Thank you very much.

[Operator:]

We have a question from Ty Gilotle [ph] with TG Research.

[Unknown Analyst:]

Have you seen any signs of stabilization or improvement in any of your geographies?

[Manuel Marquez Dorsch:]

Yes, I mean, we are -- I mean, it's kind of -- talking about green shots, Ty [ph] , it's something that people talk about and that's what we are seeing. We are seeing those green shots. And I'm more and more optimistic that 2013, even if it's challenging, will be helping us starting the corner. We've seen much more optimism on our current troops. We've seen in several market pipeline improvement. This is something that we have already seen in some specific geographies. One of our larger geographies, U.K., has the decline moderated already since the last 3 quarters. In the Netherlands, the revenue is more or less stabilized. And in other major countries, we are also seeing the pipeline is starting to improve. And the sentiment, which on a people business, on professional services company, it's always very, very important, is creating more enthusiasm and is helping us attract great talent from the industry. So we have our pipeline of candidates, top performers who could improve the top line, who wants to join Hudson improving as well. So all of that are good signs. I mean, I'm very conscious because I know that when you look at all the macroeconomic indicators all across the world, you don't see signs of improvement, it's again going to be a market share game, but I think we are ready for the fight and with a very high spirit to win.

[Operator:]

[Operator Instructions] And we have no questions.

[David Kirby:]

Thank you, operator, and thank you, all, for joining us today. We'll close the call now. Thank you for joining the first quarter conference call for Hudson Global. Our call has been recorded and will be available later today on the Investors section of our website, hudson.com. Thank you. Have a great day.

[Operator:]

And this concludes today's conference call. You may now disconnect.