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Edited Transcript of HSON earnings conference call or presentation 4-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hudson Global Inc Earnings Call

NEW YORK May 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Hudson Global Inc earnings conference call or presentation Thursday, May 4, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David F. Kirby

Hudson Global, Inc - SVP of Treasury and IR

* Patrick Lyons

Hudson Global, Inc - CFO and CAO

* Stephen A. Nolan

Hudson Global, Inc - CEO and Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Hudson Global First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call could be recorded. I would now like to turn the conference over to David Kirby. Sir, you may begin.

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David F. Kirby, Hudson Global, Inc - SVP of Treasury and IR [2]

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Thank you, Grace, and good morning, everyone. Our call this morning will be led by Chief Executive Officer, Stephen Nolan; and Chief Financial Officer, Patrick Lyons. Please be advised that except for historical information, the statements made during the presentation constitute forward-looking statements under applicable securities laws. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These risks are discussed in our Form 8-K filed today and in our other filings made with the SEC. The company disclaims any obligation to update any forward-looking statements.

During the course of this conference call, references will be made to non-GAAP terms, such as adjusted EBITDA. An adjusted EBITDA reconciliation is included in our earnings release and in our quarterly slides, both posted on our website at hudson.com. I encourage you to access earnings materials at this time as they will serve as a helpful reference guide during our call. With that, I will turn the call over to Stephen Nolan.

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Stephen A. Nolan, Hudson Global, Inc - CEO and Director [3]

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Thank you, David, and welcome, everyone. Thank you for joining us today. For the first quarter, we reported revenue of $103 million, up 5.4% on Q1 2016 in constant currency and at the upper end of our guidance. Gross margin was $42 million, up 6% on last year. Our recruitment gross margin grew 8%, with perm growth of 12.5% and term contracting was 1% lower. Gross margin in our RPO business was up 1%, and talent management grew 5%.

SG&A costs were $42 million or flat to last year. At our quarter-end, we had 1,170 fee earners, about 5% below last year. We reported an adjusted EBITDA profit of $350,000, $2.4 million better than last year, which was driven by improvements in Asia, Continental Europe and lower corporate expenses. In what is traditionally a weaker quarter for us due to holidays in Asia Pacific, this was the first time since 2011 that we reported positive adjusted EBITDA in Q1.

Turning to regional and country performance in the first quarter. Americas gross margin grew 15%, with growth at new and existing clients. SG&A costs were higher due to investment in sales and delivery people, and adjusted EBITDA was $300,000, 7.8% of revenue. Asia Pacific had a mixed first quarter with year-on-year growth in revenue of 13% and gross margin up 3% in constant currency.

In our recruitment business in Australia and New Zealand, we saw strong revenue and gross margin growth, up 28% and 13%, respectively. In our Asia recruitment business, gross margin was flat with a return to growth in China, led by Shanghai and Guangzhou. We saw continued growth in Hong Kong and a weaker but stabilizing performance in Singapore.

Overall, for the Asia Pacific region, gross margin in our recruitment business grew year-on-year by 8%, with temp contracting up 16% and perm up 4%. RPO gross margin was down 9% in Q1 with lower demand in Australia and China compared to strong project-driven growth in Q1 last year. We saw good RPO growth in Hong Kong and Singapore, driven by new clients. Talent management grew nicely led by Australia and Singapore.

Turning to Europe. Gross margin was up 7% -- over 7%, with strong growth in perm, up 22%, and talent management, up 6%, offset by lower temp contracting in the U.K. RPO in Europe grew 2% with growth at new clients, offset by lower hiring on project activity at a number of others. In the U.K., gross margin fell 11%, mainly in our recruitment businesses in England and Scotland. We have seen a reduction in demand and margins in the number of markets, especially in temp contracting at financial services clients. On a positive note, U.K. perm recruitment grew nicely in Q1, especially in March.

As we mentioned on our last earnings call, we continue to focus on adding new clients and specializations in the U.K. where we can leverage our talent management and marketing expertise. Continental Europe delivered strong gross margin growth, up 22% across all markets, with excellent performances in Belgium, up 15%; Spain, up 51%; France, up 27%; and Poland, up 10%.

We were pleased with the first quarter results, and I thank our 1,600 employees for all their hard work and dedication. For 2017, we expect continued progress in our core markets and practices, with a strong focus on delivering higher 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 in the first quarter as well as our second quarter outlook.

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Patrick Lyons, Hudson Global, Inc - CFO and CAO [4]

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Thank you, Stephen, and good morning, everyone. We incurred $200,000 in restructuring charges and continuing operations in the first quarter, all for true-ups on previous years' real estate actions. We purchased 277,000 of Hudson shares in the first quarter at a cost of $330,000. From inception of stock buyback program in August 2015, we have purchased 3 point million shares -- 3.3 million shares at a cost of $6.8 million. Our first quarter tax provision from continuing operations was a tax charge of $155,000. Capital expenditure was $400,000 in the first quarter. We expect approximately $2.5 million to $3.5 million of the CapEx for the full year.

Cash flow from operations was a use of $9 million in the first quarter and was driven by 2 main factors. First, the growth in accounts receivable of $6.5 million in Q1, given the increase in revenue, and the 6-day increase in DSO from December 2016. The increase in DSO in the first quarter is consistent with our historical pattern and driven by the seasonally low trading we see in January and February each year. Second, we had an extra monthly contractor payroll fall within the first quarter's calendar in the U.K. worth $3.6 million. This will reverse later in 2017.

Our credit facilities are designed to support our temporary contracting business in Australia, New Zealand and the U.K., and they are functioning as they should right now. We expect to generate cash flow from operations in the second quarter and the rest of 2017.

We ended the quarter with $14.8 million in cash and $15 million in available borrowings, totaling $29.8 million in liquidity. We had $11 million in borrowings on our credit facilities at the end of the first quarter, mostly in Australia, to support the continued significant growth in our contracting business.

Looking to the second quarter and using our projected average exchange rates for the quarter, we expect a revenue range of $104 million to $114 million. Reported second quarter 2016 revenue was $113 million, which translates to $108 million at constant rates, mainly due to the weaker British pound.

Our second quarter 2017 revenue guidance, therefore, ranges from down 4% to up 5% against prior year in constant currency. Regionally, we expect Asia Pacific's revenue will be above last year in constant currency with continued year-over-year growth in temp contracting. We also expect adjusted EBITDA to be better than last year.

We expect Americas revenue will continue to grow in Q2 with positive momentum across most clients, and adjusted EBITDA should also be up on 2016. In Europe, we expect revenue to be down on prior year due to the lower temp contracting at our U.K. financial services clients. However, we expect that adjusted EBITDA will be close to flat on prior year due to continued stronger results in Continental Europe, though our comparatives to prior year will get tougher as we progressed through the year due to the strong results we saw in Continental Europe in 2016. In total, for the second quarter, we expect adjusted EBITDA to be in the range of $1 million to $3 million profit, which compares to an adjusted EBITDA loss of $700,000 a year ago. The loss in the second quarter of 2016 included $2.5 million of expenses related to the arbitration settlements last year. Grace, can you please open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And I'm not showing any questions at this moment.

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David F. Kirby, Hudson Global, Inc - SVP of Treasury and IR [2]

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Thanks, Grace. I'll make some closing remarks, and we'll be monitoring that Q&A line if anyone does join. In the meantime, thank you all for joining our first quarter conference call. The call today has been recorded and will be available on the investors section of our website at hudson.com shortly. Grace, if we don't see any further questions, we can conclude the call.

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Operator [3]

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(Operator Instructions) I'm not showing any questions at this moment.

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David F. Kirby, Hudson Global, Inc - SVP of Treasury and IR [4]

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Thank you, Grace, and thank you all for joining our call today. Good day.

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Operator [5]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.