Hudson Global, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning. My name is Connie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hudson Global Q2 2013 Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. David Kirby. Please go ahead.

[David Kirby:]

Thank you, Connie, and good morning, everyone. Welcome to the Hudson Global conference call for the second 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 Stephen Nolan. In addition, during the question-and-answer portion of our call, Frank Lanuto, our Controller and Chief Accounting Officer; and I, will be available for answering questions. 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 vary -- 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 analysts' expectations or estimates or 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 our earnings materials at this time. They are posted on the website under Featured Documents and will serve as a helpful reference guide during our speakers' remarks. I will now turn the call over to Manolo Marquez.

[Manuel Marquez Dorsch:]

Thank you, David, and good morning, everyone. Earlier today, we released results for the second quarter of 2013. Although year-over-year comparisons continue to be tough, we have started to experience sequential traction. Compared to the second quarter last year, revenue declined by 16% and gross margin by 21%. During the quarter, adjusted EBITDA was minus $2.5 million, including $700,000 of cost related to the CFO transition. Our results continue to reflect the challenges of implementing the transformation plan in a difficult economic environment. Let me [indiscernible] here first. We cannot be, and are not satisfied with these financial results. However, when we embarked on our company's new strategy to optimize our operations in mid-2011, we recognized that this would be a multiyear effort. And we are encouraged by the clear signs of progress we've made on both strategy and business performance in this past quarter. Our gross margin and adjusted EBITDA grew sequentially in nearly all markets. This includes our largest single country, Australia, the Americas, and some of our Continental European businesses, which grew at a rate that exceeded the last year's sequential growth in the second quarter. In Europe, where economic conditions are particularly poor, our Netherlands specialty contracting business remained a solid performer with revenue holding steady as compared to the same quarter in 2012. And our business in Spain increased its revenue, gross margin and adjusted EBITDA over the same quarter, a year earlier, despite 26% unemployment in the country. In France, we've successfully completed the social plan required by the French government for restructuring and reorganization, and we renegotiated our price [ph] office lease. We expect to save over $2 million annually with the combination of just these 2 actions. We are further encouraged by the renewed momentum of our 2 global practices

[Stephen Nolan:]

Thank you, Manolo, and thanks to all of you for joining us this morning. I'm very pleased to be a part of Hudson. I'm excited about the company's prospects and the potential of its underlying business, the signs of progress we are making on our transformation, and the great leadership team that has been assembled here. As I finish my second month at Hudson, I still have a lot to learn. But it's clear that the task ahead of us now is to translate the strategy and the long-term vision into shorter term success, to top line growth, disciplined execution and process improvements, all while turning our current cash usage into cash generation. These will be my areas of focus in the coming months. While the company's transformation is well underway, and acceleration is a priority, it will take some time to fully deliver on these 4 critical business drivers. As Manolo said, our second quarter results were below that of second quarter of 2012, as we expected, but showed progress in small and large ways. Gross margin grew sequentially 7% on a reported basis and 9% in constant currency. We experienced sequential gross margin growth in nearly every country, with the highest levels in Spain, Singapore and New Zealand, each growing between 34% and 45% in constant currency. RPO gross margin was up 15% in Asia Pac, helped by expansions within existing clients and increased volume at the close of a client contract. Europe RPO was up 10% over the same period last year in constant currency. In Australia, New Zealand, temporary and permanent recruitment saw a double-digit sequential increase, as we began to gain some traction in the market there. Although the Americas gross margin was down year-over-year in the second quarter, as we anniversary some larger projects from 2012, our Legal eDiscovery business in the U.S. is starting to show traction as we had 16% more temporary contractors on billing from April to June. The legal pipeline appears reasonably strong at this point in time. Still, our business is in the midst of a transformation, we have plenty of work to do. We are more meaningfully affected now by economic headwinds than we expect to be once a strong operational foundation is restored. And there are some stark realities to our second quarter results. As you know, the Asia Pacific region, and especially Australia and China, are particularly important for us and we are closely working with the regional management team to improve our operations there. In Australia, there has been a hiring pullback and a decline in business confidence impacting the market for permanent recruitment. In our case, this contributed to a 24% constant currency drop in gross margin in that market. New Zealand's performance is better, where gross margin declined by only 6% on a year-over-year basis. In China, the economic slowdown and the struggles of multinational technology firms, which has been our core client base, resulted in a drop of 25% in gross margin on a year-over-year basis. Our large European markets of the U.K., Belgium and France suffered in the face of challenging economic conditions, with gross margin dropping approximately 20% in constant currency in these markets. All that said, I've hit the ground running and I'm working with our leaders in every market to find ways to accelerate our performance improvements in the short term. Here are some additional data points on the second quarter. We incurred $1.2 million in restructuring charges in Q2 for real estate actions in France and staff actions in the U.S. and corporate. Year-to-date, we have incurred $3.2 million in restructuring. We expect to incur the remaining $800,000 of our board-approved charge in the second half of the year, and we expect approximately 1.5x annual return on the charges taken so far this year. Our second quarter results included $900,000 of stock compensation compared to $1 million a year ago. As previously noted, the 2013 management grant was allocated in May as opposed to our traditional February timing, and this timing difference impacted first and second quarter costs. The lower stock price in 2013 also plays a role. The full year cost for equity is expected to be approximately $2 million to $2.5 million. Our Q2 tax provision was $140,000. A year ago, we disclosed and reversed a tax reserve of $3 million, so the year-over-year comparison is less meaningful. For the year, we expect to record an overall tax expense of approximately $0.5 million, principally for withholding taxes. Our DSO was 50 days, flat to a year ago, and a one-day improvement from the first quarter. We ended the quarter with $28 million in cash and $36 million in available borrowings, totaling $64 million in liquidity. We used $3.4 million in operating cash flow during the quarter and had $700,000 in borrowings at the quarter end. Most of our availability is based on our accounts receivable, and therefore, will expand and contract with the size of the business. In Q2, about 90% of our availability came from our 2 largest credit facilities, RBS, supported the U.S. and UKAR; and Westpac, supported by the Australia-New Zealand accounts receivable. The remaining availability came from our smaller facilities in Continental Europe and Asia. Capital expenditure was $500,000 in the quarter. We have postponed some planned CapEx expanding and now expect full year capital expenditures to be between $4 million and $5 million, down from our original estimate of $6 million to $8 million. In terms of the current outlook, we considered a few factors. The economic environment remains challenging. We are still executing a transformation, and as a result, the path will likely remain bumpy. Q3 will likely suffer from traditional seasonality driven by August slowdowns in Europe and transitions in RPO accounts in Asia Pacific. With all this in mind, our outlook for the third quarter is for revenue of $165 million to $175 million of prevailing exchange rates, and an adjusted EBITDA loss of between $3 million and $5 million. This revenue range implies a year-over-year decline of between 7% and 12%. Regionally, I expect the Americas to perform better than our overall company year-over-year revenue range. Europe to be within the range and Asia Pacific to be lagging the range, both because of tough conditions and the weaker Australian dollar. As I look out beyond Q3, I see a company with real strength in its underlying assets, its global footprint and its people. With a focus on our disciplined execution, the efficiency gains in our operations and strong recent additions to the team, we expect to show good progress in the coming quarters. I look forward to working with Manolo and the team on improving the operational and executional drivers that I have discussed today. We welcome your questions at this time. Connie, please open the line for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jeff Silber.

[Jeffrey M. Silber:]

Just wanted to follow-up on the outlook comments that you were kind enough to give us some color about expectations by geographic segment on the top line. I was hoping you could do the same thing that underlie your EBITDA forecast.

[Stephen Nolan:]

Jeff, well, the EBITDA by region will depend on what our top line does. And within the guidance, there's a fairly wide range. But I'd say given that the trends are expected to largely follow the recent revenue statements. So compared to Q2, we'd expect broadly similar trend in the Americas, there will be some seasonal weakness in Europe and potentially some weaker results in Asia Pacific.

[Jeffrey M. Silber:]

Okay, great. And then just kind of stepping back and looking at the company as a whole, obviously, it's got a lot of different parts that are moving, to some extent, in different directions. Some improving, some not. Is it worth kind of stepping back and maybe making a strategic review of the entire company to see what pieces fit in and see what pieces may not?

[Manuel Marquez Dorsch:]

You're asking that question to Stephen as a newcomer, right?

[Jeffrey M. Silber:]

To some extent, I think, that might give you an opportunity to get some fresh eyes on the business.

[Stephen Nolan:]

Okay. Well, certainly, yes. I mean, on the one hand, Jeff, I bring in fresh eyes. I bring in eyes. I've been in the staffing business for the last 8-plus years. So used to a kind of a multipractice, multidiscipline business, based on my experience at Adecco. And each one has its own sort of dynamics that go with the cycle. There is, for sure, some great businesses here. RPO and eDiscovery, I think, I've seen some real strength there. There are, I think, some geographies that we seem to be struggling in, that we'll be looking at. And we're heavily dependent on perm, and that's been a bit soft for us. So I think that's my early indication at this point. And maybe Manolo, do you want to add anything else?

[Manuel Marquez Dorsch:]

Yes, I mean, I think that usually what you see, what we have seen in past recessions, is that the world is not exactly couple [ph] on the same pace. And we see that when Europe was going down, America was folding or vice versa. And in 2012, for the beginning, at least, the emerging markets played an important role. Now everything is locking to the same place, and it looks like everyone is struggling. Potentially, the Americas is doing a little bit better. But I think that in broader terms, and you can discuss and we have discussed, that we'll always do pruning whenever we need to do pruning. But in broader terms, I think that's good that we have a diversified platform with Asia Pacific, Europe and the Americas in the 3 regions. I think that the one region where we feel that we were underinvested was precisely the Americas. The Americas today is only 15% of our gross margin. And in global companies, because of the size of the economy and the opportunities here, the Americas should play more like a 40% weight in the overall portfolio. So the fact that we now have an excellent leader in the Americas, that we are seeing her getting traction, that we are investing in new leaders here, hopefully, will make the Americas grow and take advantage of the green shops [ph] that we are seeing in the region.

[Operator:]

Your next question comes from the line of Mark Marcon.

[Mark S. Marcon:]

I was wondering if you could add a little more color, Manolo, with regards to what you are seeing in the Americas. You indicated that things are likely to improve. The year-over-year change in the Americas was down a little bit worse in Q2 than it was in Q1 against an easier comparison. So can you talk a little bit about what you're seeing that's improving and how we should think about those trends going into Q3?

[Manuel Marquez Dorsch:]

Yes. Well, I think without -- I'm going to hesitate to give you a specific date, but I think in the Americas, you will see sooner than anywhere else to restore year-on-year growth pretty soon. So I think that you will see that coming very soon. And obviously, this is work in progress, as I said, Lori Hock has been in command of the Americas only for 6 months and seems to get some time. There are 2 factors that make a comparison on Q2 year-on-year hard. Specifically relating to the 2 practices that carry all today most of the weight of the American business

[Mark S. Marcon:]

And can you talk a little bit about some of the specific steps that Lori has implemented to change the operational focus? And what are you starting to see from that?

[Manuel Marquez Dorsch:]

So I think Lori is doing 3 major things that are performing and getting the Americas in gear. We've mentioned the attraction of leaders, of new leaders, to reinforce our management team. I think that, and I have underscored that also on my script, a professional services company is faster turning [ph] the corner when you start attracting leaders. If you become a talent magnet and the new leaders that come on board can attract new leaders, that's kind of a path for growth. It's all about the quality of the people that you've got. So the fact that we have become a talent magnet now with all that we have -- of great leaders, it's a very positive outcome of what we have started to do. The second thing that Lori has done is she has started a project that it's [indiscernible] after something that she run in Adecco, so she had a high percent [ph] upfront. And by the way, she did that together with Stephen Nolan, so it's great that both of them work together here as well. That we internally code named Project Bloom, which is looking at all the way from soup-to-nuts of getting a business, until we execute the business and reengineer the process to look for effectiveness. She started that project in February and we are already starting to get the return from all the effort that she has made on fine-tuning and making much more efficient and productive the delivery part of the chain. And then the first thing that she is doing, and she's great at that, is being a leader on the market front, making a much more client-centric organization, activating all our managers and troops to be closer to the client, to be much more selective on the assignments we take, to ensure that we look for client satisfaction and then we create traction on that front from the target on larger accounts.

[Mark S. Marcon:]

Great. And so it sounds like the product of all of those efforts is -- we should see some, obviously, July and August are tough periods just from a seasonal perspective, but on a year-over-year basis, we should see some improvement in terms of a lower level of year-over-year decline, is that correct?

[Manuel Marquez Dorsch:]

Yes. And pretty soon, a year-over-year growth.

[Mark S. Marcon:]

Manolo, are you thinking that some time next year? Or you're thinking that, that's even possible some time this year?

[Manuel Marquez Dorsch:]

It is possible some time this year.

[Mark S. Marcon:]

Okay, great. And then what are you seeing with regards to Europe? You've made some positive comments with regards to Spain. It looks like the U.K. is improving from a macro perspective. Can you give us a little bit more of a sense in terms of the country-by-country dynamics over there? And how that should unfold in terms of your plans over the next 6 months?

[Manuel Marquez Dorsch:]

So it's all about leaders and we just talked about Americas and see how much of an impact a new leader that is coming, hitting the road running with previous market experience and with also a reputation on the network in the market, so that she can be recognized all clients and talents, how much that happens. So in Europe, we have done the same in France by recruiting Alexis de Bretteville. Alexis is, as I said, a Michael Page veteran for 20 years. He's a French national, he started Michael Page in France. And you see, he's a CDI [ph], I guess, on our webpage and on the press release that we announced this morning. But he is very well-versed in Europe. He started Michael Page in Spain, he runs out in Europe, then he restructured and turned to profit Michael Page in Germany, and led Central and Northern Europe. And then with that, he was moved to the Americas in 2006 where he spearheaded the growth of Michael Page in the U.S., but most mainly in South America, where he turns out to be the second-most profitable region of Michael Page. So that's Alexis in France. France is a tough market. It took us time to restructure that. We have helped Alexis. So before he came in, we made a restructuring of a social plan, which took time in France, and also renegotiated our lease. Which puts France almost with great given rates depending on the actions that Alexis would take in the next 2 months. And France should be an important market for us. I mean, unfortunately, we're not in Germany, in Continental Europe, that's the other one large market. We have a fantastic business in Belgium. We are market leader over there. Ivan De Witte, who is the founder and Chairman of our business in Belgium, and is a major market force over there, he's been the founder in Belgium of the federation of recruiting firms and clearly putting Hudson to a double [ph] leadership position in the market, and totally has been distracted, helping out in France and in Sweden until we secured Alexis and the leader I'm going to talk about in Sweden. But Ivan is now having Alexis and Anna Remnelius in Sweden to help him in Europe, and he can concentrate to help us in Belgium. So I'm sure that Belgium will be benefiting from Ivan's more dedication to the market very soon. In Sweden, we recruited and joined us in January, one of the top leaders of Mercuri Urval, which is a market leader of Sweden. And Anna is also [indiscernible] in Sweden. In Spain we have a great leadership team. They have used Talent Management in a way to counter the fall of primary recruitment. So by focusing more on Talent Management, today the Spanish business is 50% Talent Management, 50% recruitment from a 30% Talent Management a couple of years ago. And that has made the business much more resilient in a market with our operators [ph] are suffering as well. In the Netherlands, we started 3 years ago on a program to put much more value on our contracting solutions, including some project management and a scope-of-work-type of services, mainly dedicated to the engineering, sophisticated engineering and energy sectors. That business was almost nonexisting for us a few years ago, now it's a major part of the business, a major part of our growth. We saw the results published by our main competitors in the Netherlands, a major large recruiting multinational headquarter in the Netherlands, who has a similar business than us, and they were decreasing and we have been staying flat there. So we are really confident that we are winning market share to that [ph] strategy. So that's kind of growth to the major markets of Continental Europe and in the U.K. In the U.K., as you know, 40% of our business work in financial services, very much is skewed to the city. That had been suffering. We have a great leader in the U.K. who was leading our Scottish region in the U.K., who has performed very well, again, holding up against the recession. And we have asked her to take charge of England as well. She has done that a few months ago, and we are still in work on progress on England. So we are not getting all the traction that I would like to have over there. That's probably the story that where we need to still focus in the next few months. But I'm also confident that we've got a great leader there, and we've got to put that back in shape.

[Operator:]

Your next question comes from the line of Theo Mascovich [ph].

[Unknown Analyst:]

Manolo, say, it's terrific to see some sequential increase in sales here, that's a real positive, congratulations on that.

[Manuel Marquez Dorsch:]

We'll have to start there and then transform that into year-on-year growth.

[Unknown Analyst:]

Right. It's been about 2 years now, so when are shareholders going to see, in your view, a return to profitability? All these things sound really good, but when are we going to see profitability?

[Manuel Marquez Dorsch:]

Yes. Well, that has to happen. I mean, I know that has to happen real soon. I mean, I am -- we have not put that in the guidance and I'm not going to give you an exact date. But we know, and Steve and I are very conscious that we need to do that really soon.

[Unknown Analyst:]

How soon is soon?

[Manuel Marquez Dorsch:]

Really soon. So it has to happen in the next few quarters. So in the coming year.

[Unknown Analyst:]

Okay. Well, one of the things we've noticed with your presentation here, it sounds good, attracting key people -- leaders. However, with the company priced at just $0.10 on the dollar, in terms of sales, 1/10 of sales, why is it we haven't seen any insider buying by either officers or directors? It questions management's and the board's commitment and engagement here and alignment with public shareholders.

[Manuel Marquez Dorsch:]

Well, I think that you have to take into account the restriction that we have on our open windows. And we told the information that I have shared with you, that I'm sharing with you now, the fact that we are changing our CFO and we are having conversation with Stephen, we were restricted from buying. So maybe you want to ask me that same questions after the next open window.

[Operator:]

Your next question comes from the line of Ty Govatos.

[Ty Govatos:]

Your comment that the U.S. is underrepresented, I agree, especially with that loss carryforward. But are there any steps you have considered besides just relying on eLegal (sic) [eDiscovery] and RPO to get that representation up?

[Manuel Marquez Dorsch:]

Well, I mean, I think that we are focusing on organic growth at this moment. We have also -- keep in mind that we don't want to lose our shareholders. And at this moment, we cannot consider any acquisitions. So the best way to grow organically is betting on those 2 practices. We are holding on our IP practice, which is very good, too. It's profitable, we are focusing that on large clients. But it's difficult to scale up the IP practice on the same way that we can scale up RPO and eDiscovery.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jeff Silber.

[Jeffrey M. Silber:]

Just a couple of quick follow-ups. You had mentioned about the insider, potential insider buying. When does the window open up again?

[Manuel Marquez Dorsch:]

August 6.

[Jeffrey M. Silber:]

August 6. Okay, great. And then from a modeling perspective, what should be we be modeling for corporate expenses in the current quarter? I know it was a little bit high in the second quarter.

[Stephen Nolan:]

It should be about this last -- I would say excluding the unusual item in Q2, so probably about $4 million.

[Jeffrey M. Silber:]

I'm sorry, the unusual item in Q2 was roughly how much?

[Stephen Nolan:]

$700,000.

[Jeffrey M. Silber:]

$700,000.

[Operator:]

We have no further questions at this time.

[David Kirby:]

Thank you, operator. And thank you, all, for joining the Hudson Global Second Quarter Conference Call. Our call today has been recorded and will be available later today on the investor section of our website, hudson.com. Thank you, and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating. This does conclude today's conference call. You may now disconnect.