Hudson Global, Inc.
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good morning. My name is Jasmine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2013 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to you, David Kirby. Please go ahead, sir.

[David Kirby:]

Thank you, Jasmine, and good morning, everyone. Welcome to the Hudson Global conference call for the third 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. 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 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 conference call, references will be made to non-GAAP terms such as EBITDA. An EBITDA reconciliation is included in our earnings release and our quarterly slides, both posted on our website, hudson.com. I encourage you to access these materials at this time. They are posted 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 Marquez.

[Manuel Marquez Dorsch:]

Thank you, David, and good morning, everyone. Earlier today, we released results for the third quarter of 2013. Our results were consistent with the guidance we provided on our second quarter earnings call, with adjusted EBITDA slightly better than the top end of our estimated range and revenue just slightly below our estimated range. Our cash position remains strong, growing by $4 million in the quarter. Last quarter, I spoke to you about our 4 areas of attention for the second half of the year. We are aiming at returning the business to sustainable profitability and top line growth, and we made meaningful progress during the quarter. As a reminder, those 4 areas of potential for the second half are

[Stephen Nolan:]

Thanks, Manolo, and Thank you, all, for joining us this morning. As Manolo detailed, it is essential that we restore top line growth to the business as soon as possible, while we continue to identify and exploit opportunities to gain efficiencies in our operations. We have been able to offset the majority of our year-over-year gross margin decline with lower costs, and we are closely working with the our business leaders to institutionalize a number of key elements, including operational focus and disciplined execution. As we continue to reduce costs, a portion of those savings should improve our bottom line performance, while another portion will allow for investment in frontline staff. When we invest, we are allocating resources as efficiently as possible to our most processing promising markets and product offerings. Looking at the third quarter results, there are a number of highlights. Our revenue was down 3% sequentially on a constant currency basis, which is much improved from the 9% sequential decline we experienced a year ago in the third quarter. While our overall revenue in Australia declined by 4% sequentially in constant currency due to the major RPO client transition that Manolo mentioned, we are seeing stabilization in our recruitment business in Asia-Pacific amidst tough economic conditions. And we will start to see the impact of the new large RPO client in Q4. U.K. revenue was up 3% sequentially in constant currency led by sector growth and financial services, retail and pharmaceuticals. And we had solid cash generation and an increase in availability as well with cash up 17% and availability up 8% from the prior quarter. At the same time, we continue to face challenges in many of our markets and have been unable to deliver year-over-year top line growth. Reversing this declines is a priority for us. In the third quarter our revenue declined 13% from prior year and 10% in constant currency. We were able to narrow the year-over-year constant currency decline for the fourth consecutive quarter, an indication that we are moving in the right direction. In Asia-Pacific, gross margin declined 23% year-over-year in constant currency primarily weaker results in RPO and recruitment. The strengthening of our business in Australia is critical to our long-term success in the region, and we were pleased to see sequential improvement in our recruitment business there. China remains mixed down on the year-over-year basis for growing sequentially as did Hong Kong. In Europe, our gross margin was down 12% year-over-year in constant currency driven by slower temp contracting in the U.K. and weaker results in talent management primarily Belgium, which were somewhat offset by strong performance in our Dutch business. In the America's, gross margin dropped 5% due to weaker performance in IT. eDiscovery revenues slowed during the quarter, however, we do expect to see an impact in the coming quarters of our recently hired sales leadership ramps up. Here are some additional data points on the third quarter. We incurred $700,000 in restructuring charges in Q3 for actions across nearly all our markets. Year-to-date, we have incurred $4 million in restructuring. We continue to expect approximately 1.5x of annual return on the charges we have taken. Our third quarter results included $400,000 of stock compensation compared to $500,000 a year ago. And the full cost of equity is expected to be approximately -- for the full year costs is expected to be about $2.5 million. Our third quarter tax provision was $45,000 as compared to $1 million a year ago. The reduction in the provision results largely from lower earnings in the current year. For the full year, we expect to record an overall tax benefit of approximately $300,000, principally for countries where we can record a benefit for losses, partially offset by adjustments for tax rate changes and withholding taxes. Our DSO was 49 days, flat to a year ago and a 1 day improvement from the second quarter. We ended the quarter with $33 million in cash and $39 million in available borrowings, totaling $72 million in liquidity. We generated $5.6 million in operating cash flow during the quarter and had no borrowings at quarter end. In the third quarter, over 85% of our availability came from our 2 largest credit facilities, RBS supported by the accounts receivable in the U.S. and U.K. and Westpac Bank supported by the accounts receivable in Australia and New Zealand. The remaining availability came from our smaller facilities in Continental Europe and Asia. We did renegotiate our fixed charge covenant with Westpac during the third quarter as our business in Australia navigates more challenging market conditions. We remain in regular dialogue with each of our banks and are confident that those relationships will continue to the benefit us going forward. Capital expenditure was $700,000 in the quarter and we expect full year capital expenditures of about $3 million to $4 million. In terms of the fourth quarter outlook, we considered a number of factors. #1, conditions remain challenging but there are signs of improvements that are evident in some markets; #2, the impact of new leaders and new talent we have put in place during 2013; and #3, seasonality will improve in Europe in Q4 but slows in Australia and New Zealand. With all these in mind, our outlook for the fourth quarter is for revenue of $155 million to $165 million at prevailing exchange rates and adjusted EBITDA of between $1 million and $3 million loss. This revenue range implies a year-over-year decline of between 10% and 16%. I expect the revenue decline in each of our regions to be relatively consistent with the overall range. Sequentially, the Americas should be consistent with Q3, while as Europe should be better and Asia-Pacific may lag a bit as the third quarter seasonality reverses for both markets. The focus for me going forward is twofold. Working directly with our operating leaders to help them generate top line growth and identifying areas where we can reduce our cost base. As I review our expense structure, there are a number of areas that we can continue to target for improvement. For example, real estate remains a focus for me and we are working on lowering our annual rent in a number of key markets. All areas of support costs are under review as we continue -- as we need to continue to find ways to be more efficient and more cost-effective in how we service our clients. I'm encouraged by the strong commitment of our teams and the very talented people in our front office around globe that I've come to know over the past few months. I know we have all the ingredients to be successful, with a commitment to effective cost management, smart and disciplined execution, aggressive marketplace activity and a continued focus on delivering the highest quality of service to our clients and candidates, we should experience improved business results in the coming quarters. Jasmine, please open the line for Q&A.

[Operator:]

[Operator Instructions] You do have a question from the line Bill Nasgovitz.

[William John Nasgovitz:]

Just a couple of questions. You said you won a couple of major -- we won a couple of major contracts in Australia. Could you just elaborate a little bit in terms of what's the differentiating future? Or why we were chosen? And then secondly, in terms of restructuring charges, when will they end?

[Manuel Marquez Dorsch:]

A couple of major contracts that we won in Australia, I was referring to was in talent management. The contracts are won on the assessment ground of talent management and other one on the outplacement world. On the outplacement, it's a contract for all the teachers department of the district of Victoria where we will be helping outplacement all the teachers that the government is going to outplace because of the colliding budget in the government. And the assessment is in the government of New South Wales, where they want us to assess over 400 leaders of all the government of New South Wales. Our reputation in Australia in Talent Management is really top-of-class in both areas. We had been working with the government of New South Wales on similar projects for the past few years and we have proven excellence in delivery. And in the outplacement in Victoria we have been working with them just for 1.5 years or so and we have beaten all our completion in all our deliverable parameters. I'll leave that to Stephen on the restructuring question.

[Stephen Nolan:]

Thanks, Manolo. Bill, I think we are obviously focused on delivering top line growth, as well as ensuring profitability. So we look very hard at the actions we need to take to optimize our support costs across our network. And I think we're still looking at the area of opportunities there and as far as possible for example in the case of real estate, we will adjust our costs base without taking any restructuring charges but there may be a need as we go forward to take some more.

[William John Nasgovitz:]

So you do anticipate perhaps additional charges in Q4?

[Stephen Nolan:]

We are working on some programs now as I said. And it's a possibility, yes.

[Operator:]

[Operator Instructions] Your next question comes from the line of Mark Marcon.

[Mark S. Marcon:]

I have a number of questions. I'd like to follow-on to Bill's question to start. Can you just talk about -- Steve, can you talk a little bit more about the -- some of the -- how you're thinking about the potential for cost reductions? We've talked in the past about potential levels and how -- now that you've been with the company for a while and you had a chance to go and see different operations, what's your general assessment in terms of how significant those opportunities could be?

[Stephen Nolan:]

Well, I think -- there's a part of it, Mark, that if you look at the inherent nature of the business that Hudson has built up of the different pieces and there's a piece now with the declining revenue that has obviously some cost we need to take out, at the same time, obviously in Australia and Shanghai a month ago or 2, it's clear we need more fee earners I think this is same way in the U.K. So my goal at the moment is to and we have done this so far this year taken out over $2 million in real estate, that's coming on an annualized basis not all in this year. And we'll continue to look very, very heard at that, we have some large offices in some expensive cities that we need to figure out how to make sure operations can run as efficiently as possible but perhaps not with the same burden. At the same time, we -- there are some jobs eliminated in the third quarter. Quite senior folks, and we will continue to look at areas where we can simplify our business, take out costs and so -- for me, it's a view of trying to take out the money to invest back because we need to add people at the same time. We have to head towards profitability.

[Mark S. Marcon:]

So would you view it more as a situation where whatever you end up taking out probably ends up giving reinvested in terms of fee earners in order to get the top line growth going?

[Stephen Nolan:]

Well, I think it's a mix, it is not a dollar for a dollar. I think it's -- there's a piece that says we have to be able to reduce our cost base and have an increased gross margin. So that's -- and as we in some markets, head towards that trying to see year-over-year growth. We will -- the leverage there has to allow us to have more of that gross margin growth drop-down. So if not, I think it's a mixed sort of balance of the 2.

[Manuel Marquez Dorsch:]

I mean I think we have to do both. We have invest and we have to take cost. And we have to take more cost than we invest back because we feel we are aiming at recovering the 7% to 10% EBITDA margin that we said. I mean, it will take time until we do that. But that obviously goes through making sure that our the platform that we have to operate our business is simplified. We have discussed other times, we have inherited the platform that is decentralized and didn't take into account any synergy about our operation. And the difficulty -- I mean, we did take cost in 2012 -- the difficulty of the second round of restructuring that we are doing now. And this is where Stephen, with his sharp eye in operations is helping us tremendously. Is that as we engage in this second phase, we need to change the processes to drive those efficiencies. When we talked about increasing our fee earners, the one thing we are doing now is be very focused on bringing people with experience in our industry. The people that we have brought this year have more of a profile of experienced recruiters that are coming from other areas that we need to train. I mean, in markets such as Australia for example, where we are measuring very, very fast, we are getting more traction on the recruiting part of the business. We wish the question out of growth that Stephen and I have referred to. The speed to which one of the new consultants is bringing profits to the company has grown from approximately 3 quarters to 4 months on average. So if we continue that trend, we would not see much of an impact of the investment of the new hires within the year. It would have impact within the quarter but not within the year. So we definitely will continue taking cost out of the business and invest less than the cost we are taking to improve our profitability.

[Mark S. Marcon:]

Okay. And can you tell us roughly speaking where the overall headcount of the internal staff is right now?

[Stephen Nolan:]

Yes. So 1,700.

[Mark S. Marcon:]

1,700. And would you ...

[Manuel Marquez Dorsch:]

Out of which, we've got 1,100 approximately on the fee earners area.

[Mark S. Marcon:]

Okay, great...

[Manuel Marquez Dorsch:]

That's where we will continue to potentially invest.

[Mark S. Marcon:]

So would you anticipate that the overall headcount would be roughly the same with more of a mix shift towards the fee earners? Or would it on an overall basis would it come down?

[Stephen Nolan:]

No, I think it will come up, but we will change the mix to the fee earners, decreasing the ratio of support to fee earners.

[Mark S. Marcon:]

Okay, great. And then can you talk a little bit about -- we are seeing signs of improvement in Europe and the U.S. just broadly speaking. Can you talk about what you're seeing by geography? And Manolo, really appreciate your perspective particularly as it relates to Europe?

[Manuel Marquez Dorsch:]

I think that -- I mean, we talk about the economic sentiment which is before your start to kind of getting to the macro performance of countries with the GDP and the unemployment, which is still not there, the economic sentiment is the one that's starts bouncing back via recruiting industry. And the economic sentiment is suddenly improving in Europe, unfortunately in America, in America, we are too dependent on eDiscovery which is different business. But in Europe, clearly the sentiment is improving. And I see that in other countries around Europe, U.K. and continent. Australia is a different model. Now the issues are more in Australia. You follow very closely, Mark, what's going on there, I know our competitors, you see that our competitors are all having now year-on-year fall in Australia are on the 20% range. I think we are starting to beat our competitors sequentially. We have made our comparisons on our sequential performance quarter-over-quarter against our major competitors. And we believe that we are better than they are in Q3 and we were better than they were in Q2, which réconforts us that even if we are not driving, our EBITDA to the levels that we like to be in Australia, at least we are not only preserving now but reconquering market share there. Our company platform is very peculiar as you know because 30% of our gross margin has been coming from Australia. And that has been our most profitable region. And the fact that the Australian economy is down is affecting our EBITDA and is delaying the recovery of our profitability, which is not obviously what we were expecting. But the situation there is really tough. And as I said, you can see that everywhere. The situation is also peculiar. You cannot trust all the data that you receive on the macro front from China because they -- it's data that is not totally consistent. Clearly, as Europe and America recovers, the investment flow that we have seen in the emerging markets is decreasing. So the investment of the multinationals in China is dropping and the mix in the market is moving from multinationals to local investments in China -- in Chinese companies. And our growth before in China was pretty much driven by the growth in multinationals. And we are using that platform, our experience and the fantastic references that we've got on the multinational clients to educate the Chinese local clients on the use of our type of search, which is more premium than they want that other Chinese competitors offer.

[Mark S. Marcon:]

Great. I appreciate the detail. With regards to Australia, do you think that -- do you think we're hitting a bottom? Or do you think it's going to get worse?

[Manuel Marquez Dorsch:]

The economic situation in Australia is totally uncertain. But we have written of the excuses about the marketing stuff. We need to win market share, we need to take the opportunity that we are now to recruit the best fee earners from our competitors and fight back. So there's always business. You can go on the trend of the market or you can try to gain market share. That's exactly what we are doing. The sequential growth that we are getting in Australia is by winning market share. Unfortunately, we did lose market share before. So our objective is to regain market position and achieve year-on-year growth in Australia as soon as we can in spite of the economic environment. We have attracted many, many consultants and managers from our competitors and I think we are getting traction of demonstrating that we have a great opportunity in Hudson. And while others are now restructuring, we're able to cherry-pick best consultants to put the Australia operations for growth.

[Mark S. Marcon:]

Great. And can you give us a sense you give us very specific guidance with regards to revenue by region. I was wondering if you could give us a little bit of a sense in terms of the gross margin trends by region that you would anticipate?

[Stephen Nolan:]

Well, Mark, I think it obviously depends on the where our top line ends up and I'll give some -- a range here...

[Mark S. Marcon:]

Yes. I'm just assuming, like for example, you said in the Americas you would've anticipate that things would be flat. We did see a nice sequential improvement for 2 quarters in a row in terms of gross margins. So that would suggest that the mix of business is getting a little better. Should we anticipate that the gross margins in the Americas stays close to where it is? Or would it dip back down?

[Stephen Nolan:]

No, I think for the Americas, with expect to similar trend to the third quarter. Europe should pick up, obviously, with the top quarters in terms of the seasonality, as well as we have some weakness there in talent management. And as Manolo said, Asia-Pacific is a bit harder to predict right now, especially Australia, but we've -- I think are reasonably comfortable with the range out there.

[Mark S. Marcon:]

Probably staying kind of where it is right now? I mean, in terms of your best assessment at this point?

[Stephen Nolan:]

Yes. I mean, subject to seasonality, I think which obviously they start to head off around mid-December, so yes.

[Mark S. Marcon:]

I mean, that's kind of -- that's a tough one to talk about just simply from the standpoint, that if we take a look at the traditional trajectory, taking a look at the last 3 years in terms of your Asia-Pac experience typically going from Q3 to Q4, you typically end up staying relatively close.

[Manuel Marquez Dorsch:]

Yes, yes. I think that we have to see how much the sequential traction that we are building there based on seasonality. ...

[Mark S. Marcon:]

What's the new pricing on the new projects that you just got relative to the projects that you lost?

[Manuel Marquez Dorsch:]

Yes, well those projects are talent management projects and yes, the RPO, the Energy Australia project. I'm not able to disclose that pricing of the projects.

[Mark S. Marcon:]

But I mean is it similar to what we ended up losing? Or?

[Manuel Marquez Dorsch:]

It's better. It's better.

[Mark S. Marcon:]

Better pricing for you.

[Manuel Marquez Dorsch:]

Yes, I think it's -- I mean approximately on the way I can't tell you as approximately we expect next year to recruit with this RPO contract over 600 positions in that account.

[Mark S. Marcon:]

Okay. And then with regards to corporate expenses, what's the level that we should anticipate on a go forward basis this quarter was a little bit more elevated than usual?

[Stephen Nolan:]

Yes. I'd expect it to be a little bit shy of the $4 million mark.

[Mark S. Marcon:]

For the quarter?

[Stephen Nolan:]

Yes. It was 4 points, well before the allocation I'm sorry, I'm not sure of the number you are looking at there. But...

[Mark S. Marcon:]

I'm looking at basically $2.8 million during this last quarter.

[Stephen Nolan:]

Then it should be slightly less, lower than that I would say $2.5 million in Q4.

[Mark S. Marcon:]

So around $2.5 million or so?

[Stephen Nolan:]

Yes. With a similar -- I'm looking at more of a gross number in allocations so.

[Mark S. Marcon:]

Okay. All Right, great. And then how are you thinking the cash balance is going to look as we look towards that the end of the year? Are there any sort of factors that we should take into account?

[Stephen Nolan:]

I mean we're managing this really carefully. It's some pressure right now I think and I think we obviously what we saw in Q3 is a bit of the seasonal pattern anyway. So it will be falling off a bit in Q4, that's for sure. But we are -- it's a -- we're managing it as aggressively as we can.

[Mark S. Marcon:]

How much would you anticipate it falling off in Q4? Would it follow the typical -- there isn't a typical pattern if we just look at the history. So how should we think about that?

[Stephen Nolan:]

So the actual cash as opposed to the whole of it liquidity I mean, it's going to be down a few million -- from $3 million to $5 million from we were at the end of Q3.

[Mark S. Marcon:]

Okay. So basically bounces between where we were between Q2 and Q3?

[Stephen Nolan:]

Yes.

[Operator:]

Your next question comes from the line of Bill Nasgovitz.

[William John Nasgovitz:]

Yes, just a follow-up here. You have mentioned that I hear correctly, 1,700 total employees and 1,100 fee earners?

[Manuel Marquez Dorsch:]

Yes.

[Stephen Nolan:]

Yes.

[William John Nasgovitz:]

And where would that stood a year ago?

[Stephen Nolan:]

We had about 1,900 people and about 1,300 fee earners.

[William John Nasgovitz:]

Okay. And then, Manolo, you were talking about being able to recruit some top talent. Why are people coming to us? What's the driving -- driving issuer?

[Manuel Marquez Dorsch:]

Yes. Well, I think basically mainly 2 things. I think of the opportunity, they think that have a great brand and that we have not put in place all the processes and go-to-market techniques that allows us to extract all the value from the brand. So they see that opportunity. And because they have experienced in other firms, they know what they can do with the current systems and processes and teams. And I think that the other thing is the culture. I think that what we are trying to have at Hudson is a culture that allows to give people a space and that is more collegial. And in some of the other companies, what they have seen is more of command and control environment. And what I am trying to bring at the top with my leadership team is more of a shared leadership culture. It's always difficult to kind of strike a balance between smart and disciplined execution on this space and shared leadership. And I think it's great that now having Stephen by my side, he can concentrate on the more disciplined execution, while I'm continuing to attract the talent and make sure that we grow the top line.

[Operator:]

There are no further audio questions at this time.

[David Kirby:]

Well, then thank you, operator, and thank you, all, for joining Hudson Global's third 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. Have a great day.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.