Good morning. My name is Sun [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Hudson Q1 2014 Earnings Call. [Operator Instructions] Thank you. Mr. David Kirby, you may begin your conference. .

Thank you, Sun [ph], and good morning, everyone. Welcome to Hudson Global conference call for the first quarter of 2014. 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. .

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 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 these documents at this time.

They are posted on the website under Featured Documents and serve as helpful reference guide during our speakers' remarks. .

I will now turn the call over to Manolo. .

Thank you, David. Thank you all for joining on our first quarter 2014 earnings call. On our last earnings call, I spoke about the clear evidence of the advancement of our strategy.

Our progress the most probably increased in this first quarter with revenue and adjusted EBITDA both meeting the top end of the ranges we provided in our outlook for this quarter. .

First quarter revenues were $162 million, above the range we have guided, and adjusted EBITDA loss was $2.1 million, again above the guidance range and a 57% improvement over the first quarter of 2013. Gross margin was $58 million, an increase of 2% over the first quarter of 2013 in constant currency.

Most importantly, each of our permanent recruitment business, RPO and talent management, delivered strong double-digit year-over-year gross margin growth in quarter 1. We believe this demonstrates the benefit of a more focused approach to our business. .

Our aim is to deliver significant and sustained value to our stockholders as a world-class global provider of talent solutions.

Over the last 2 years, we laid the foundation for consistent, high-quality, differentiated services for our clients and candidates, gross margin growth, sustainable profitability and substantial improvement in value for our stockholders.

We're seeing that foundation as time to bear fruit as the trajectory of our financial performance has changed significantly over the past 6 months..

We are evolving Hudson from a company that runs its regional operations mostly as an independent portfolio spread through a variety of practiced [ph] geographies and supported by add-on systems and processes with an aligned, efficient and focused business led by industry veterans, who drive consistent, disciplined execution across our organization.

Our recent progress has been driven on the strong foundation we build and by the initiatives we launched during the last few quarters.

Most notably, first, investing in key recruitment offices and practices, both represent the greatest opportunity for Hudson to win; second, leveraging our prominent RPO position in Asia-Pacific and growing our footprint in Europe and the Americas to become a global RPO leader; third, growing our talent management solutions through product innovation and cross-selling; fourth, further improving the company's cost structure and efficiency of its support functions and infrastructure; and fifth, building a strong leadership team capable of retaining and attracting top talent..

Let me cover each of these points in more detail. First, investing in key recruitment offices and practices. Our permanent and contract recruitment business represents 64% of our gross margin.

We carefully analyze our practice and geographic mix to focus our resources in those areas where we have strong leaders, specialized capabilities and clear opportunities to scale our business. In short, the areas where our potential to win market share is greatest.

Most of our investment is in Asia-Pacific and the U.K., our largest recruitment market, where we have a strong presence and a well-known brand. Both operations generated top line year-over-year growth and substantial profitability improvements during the first quarter..

In the first quarter alone, we increased our recruitment business fee earner population in all geographies by 8% or a net of 59 consultants. Over half of the consultants we hired are veteran recruiters from the industry, which should accelerate the speeds of productivity and reinforce our recruiting top line trajectory.

In Continental Europe, a sharper focus resulted in top line growth in Belgium, France, the Netherlands and Spain, and most importantly, a return to positive quarterly adjusted EBITDA in France after losing $2.8 million in 2013.

Our long-term growth potential in Europe and Asia-Pacific is further bolstered by our specialized capability and proprietary assessment tool, which allow us to differentiate and tailor our solutions to help our clients address the most complex talent issues. .

As we bring more focus to our highest potential areas of our recruitment business, we have also explored alternatives for our other parts of the business to ensure we are maximizing overall results. And after careful analysis, the board and management have made a strategic decision regarding our legal eDiscovery business.

While eDiscovery is a significant part of our Americas revenue stream and a profitable business for us, industry dynamics are shifting rapidly towards integrated technology and staffing solutions.

As part of our efforts to help ensure we get the greatest impact from every dollar we invest in the business, we have been evaluating whether we should invest in the technology required to win in this evolving eDiscovery space or explore a strategic sale so that we can allocate those dollars to our core recruitment, RPO and talent management businesses.

And after careful consideration, our analysis showed that we expect more value in continuing to invest in the recruitment, RPO and talent management businesses. And we have, therefore, retained Duff & Phelps, a leading investment bank in staffing and recruitment to assist us in exploring a possible sale..

My second point was about leveraging on our prominent RPO position and the third one, about growing our talent management solutions. These other 2 core businesses, RPO and talent management, also performed strongly in the first quarter and are on a positive trajectory. RPO grew 10% year-over-year in Q1 in constant currency.

And our RPO business represents 15% of our total company gross margin now. We enjoy a strong competitive position in Asia-Pacific, where NelsonHall estimates we are the second-largest player in the RPO market. And we continue to make investments in the business in all 3 regions.

During the past few months, 8 industry veterans joined our RPO team in leadership roles across the globe. Our investment payoff in RPO was most obvious in the Americas, where gross margin increased by 53% year-over-year in quarter 1. RPO has now become the largest practice in the Americas region on a gross margin basis. .

Our talent management business grew 14% year-over-year in Q1 in constant currency. Talent management represents 14% of our total company gross margins.

Hudson has more than 20 years of experience in talent management with a distinctive research and development center, working with world-class universities and management schools and 150 licensed assessment consultants.

We enjoy particularly a strong market position in Belgium and Australia with an estimated 15% and 17% market share respectively in those countries.

Our long-standing service excellence and overall reputation was recently rewarded in Belgium with the signing of a 4-year engagement as the sole assessment partner to the European Commission and in Australia with a 2-year contract for the New South Wales Public Service Commission Senior Executive Development Program..

My fourth point was about further improving our company's cost structure. During the last 3 years, we focused on achieving efficiencies in our operations and reducing our cost base. Our 2013 support cost structure was $24 million or 19% less than 2011. We are committed to operating a leaner, more integrated support structure.

And to further progress in this area, we have engaged AlixPartners, a premier consulting firm in the areas of organization design and operational improvement. They will assist management in a comprehensive assessment of company's organization and operations.

The engagement with AlixPartners is focused on identifying opportunities to better align our organization to support future growth and to further improve our operating efficiencies and effectiveness. .

And my fifth point was about a strong leadership team. We have significantly strengthened our management team, a critical component to the success of any business. Along with Stephen, 25 veteran leaders have come onboard over the past 1.5 years, including our CEOs of the Americas and Europe and our managing directors of Asia, U.K. and France.

This strengthened leadership team has brought added discipline to our business practices and is driving a performance-focused culture that has been essential to improving our results. And in Q1, we continue to attract talent from competition to complement our existing teams across the world.

Thanks to the progress that we are making as a company and the excitement about our new leadership team is proving to be a talent magnet, a great position for a professional benefits company, where more than anywhere else, you're only as good as your own people..

In summary, going forward in 2014, we will continue to first invest in the practices and markets that present the most significant opportunity for profitable growth. Second, to further identify and deliver greater efficiencies across the organization, particularly in our core areas with the assistance of AlixPartners.

And fifth, explore a strategic sale of our eDiscovery business, assisted by Duff & Phelps..

We are excited about where we're today. The 2-year foundation building has substantially progressed. The leadership team is in place and attracting the very best talent from the industry. We have experienced real progress in our performance for the past 6 months and expect a strong second quarter to provide further evidence of our traction.

Our services are delivering real differentiated value to clients and candidates. And most importantly, our business is on its way towards delivering our primary goal, sustained profitability and material value to our stockholders. .

And Stephen will now share more details on our financial performance and our outlook for the second quarter. .

Thanks, Manolo, and thank you, all, for joining us this morning. I'll begin with the overall results of the first quarter. Our revenue came in at $161.9 million, up 1.4% sequentially but down 1.4% year-over-year, both in constant currency. Gross margin was $57.5 million, up 2.3% year-over-year and up 1.1% sequentially both in constant currency.

And our adjusted EBITDA was a $2.1 million loss, 57% improvement from a year ago and in line with the fourth quarter of 2013..

Turning to regional and country performance. We delivered year-over-year gross margin growth in most of our business lines and geographies. Gross margin in our European businesses was up 5.4% year-over-year and 2% sequentially in constant currency.

The year-over-year increase in gross margin was driven by strong current [ph] placement and talent management results in the U.K., France, Spain and Belgium. In the Netherlands, gross margin was flat as new project starts were offset by the completion of others..

Asia-Pacific had a strong first quarter with year-over-year growth in revenue and gross margin of 11% and 6% respectively in constant currency. The growth was driven by RPO of 14%, talent management up 35% and China recruitment up 18%. For the second consecutive quarter, our Asia-Pacific performance compares very favorably to most of our competitors.

Australia recruitment was very slightly down in a tough market but grew 4% sequentially in a seasonally soft trading period. And we are starting to see some small signs of recovery in New Zealand. .

In the Americas, gross margin was down 14% sequentially and 18% below first quarter last year. eDiscovery gross margin fell by 39% year-over-year due to lower activity with existing clients plus recent new business wins were not as large as the projects that ended in 2013.

The RPO team delivered an excellent performance with 53% year-over-year increase in gross margin, driven by U.S. and global clients. .

Looking at our global business lines. RPO gross margin increased 10% year-over-year on the strength of significant growth in existing clients and new business wins in Australia, China, Hong Kong, U.S., while Europe declined as a number of contracts in the U.K. ended in 2013.

Talent management improved its gross margin 14% year-on-year in constant-currency with strong performances in Australia, U.K. and Spain. .

There were some additional data points for the first quarter. We incurred a $100,000 in restructuring charges this quarter. Our Q1 results included $500,000 of stock compensation compared with $700,000 a year ago. Our Q1, tax provision was a $500,000 charge as compared to a $200,000 credit a year ago.

We ended the quarter with $22 million in cash and $36 million in available borrowings, totaling $58 million of liquidity. In first quarter 2014, operating cash flows were $13.6 million, of which $12.4 million was an increase in accounts receivable due to the higher sales. .

DSO at March 31, 2014, was 50 days compared to 51 days last March. We had $500,000 in borrowings at the quarter end. Our credit facility with RBS expires in August and will not be renewed. We are having promising discussions with several banks to replace the facility.

Capital expenditures was $1.5 million in the quarter, of which $600,000 was related to landlord-funded leasehold improvements in Melbourne and Perth. We expect 2014 CapEx up between $3 million and $5 million. And we'll continue to be prudent with our capital investment..

As we consider our prospects for balance of 2014, conditions remain challenging in some markets but improving in our key European counties. We will continue to invest selectively in our recruitment fee earner base in order to regain market share and grow the top line.

Given the stable productivity levels we had experienced in our key markets recently and the consistent historical pattern of meaningful revenue generation after 6 months in the market, the investments that we've made to date in our consultant population should generate a meaningfully positive return in the second half of 2014.

Our prospects are further bolstered by the strong pipelines we have built in our RPO and talent management businesses and the ramping up of new business won in the first quarter.

In addition, as we work more close with AlixPartners, we believe we can find additional opportunities to improve operating efficiencies and effectiveness across our business. At this stage, we cannot quantify the financial impact or timing of these potential actions. .

With all this in mind, our outlook for the second quarter is for revenue of between $165 million and $175 million at prevailing exchange rates, an adjusted EBITDA of between $1 million profit and $1 million loss. This excludes about $1 million of proxy and strategic action costs.

This revenue range translates to between a 2% year-over-year growth and a 4% year-over-year decline. Regionally, I expect the Americas to lag the guidance range, while Asia-Pacific should be in line and Europe to be ahead of the range. .

Sun [ph], please open the line for Q&A. .

[Operator Instructions] Your first question comes from the line of James Fronda. .

You guys cut a lot of cost out of the SG&A from 2012 to 2013.

Do have any sense of what that might look like going into 2014?.

Well, it's soft because we are investing in our fee earner base. We continue to look for opportunities in our infrastructure, let's say. And we now have this work, but we're in the early stages of without carp [ph].

So if managed very carefully both as and opportunities for savings, I think there's still good work to be -- or still I think there's additional savings that we will get there. .

Your next question comes from the line of Mark Marcon. .

It's Mark Marcon. With regards to North America, you mentioned that you expect it to lag relative to the overall guidance.

Is it your expectation that it will decline sequentially in Q2?.

On a revenue -- no, we expect to see some pickup, Mark, from Q2 versus Q1. .

Like roughly $1 million or also or... .

Yes. I think of, yes, $1 million to $2 million. .

And can you remind us what percentage of Americas is the legal business?.

On a gross margin sense, it's approximately 1/3. .

1/3 of gross margin.

And what percentage of revenue?.

Right now, it's running at about half. .

And is it your expectation that, that business is now at a stable base or... .

Yes, I mean, as we know, it's a lumpy business, right? So part of the results we've seen in the first quarter is a mix of new business wins.

I mean, there's probably 6 or 7 new customers that we have won of the key business coming in, in the first quarter, offset by some quite large projects that we had in Q1 last year that ended, and we have our existing base. So I think what we're seeing at the moment is we will lag some of the history. We will continue to push hard on selling.

And at the moment, we see trends are stable. .

And I mean, regarding the announcement that you made on that business, when would you expect something to be consummated?.

Can't really comment, Mark. I mean, we're starting to process now, and we'll see how it goes. .

All right. And then with regards to Europe, it's nice progress there. Can you split out the U.K.

relative to the Continent in terms of the revenue trends that you were seeing on a TC basis?.

So U.K., on a revenue basis, is reasonably flat. On a GM basis, it was growing because of the mix of business. We're seeing some strength in Scotland. It's doing incredibly well still, and as well as some practices in England, which we talked about we need to work on.

So legal business is doing well, Mark Marcon, and Markham [ph] communication department, that group is doing well. We're still seeing some softness in the financial service sectors in England. And on the Continent, France, doing well; Spain, doing well; Belgium, back on track after a tough year last year. So it's pretty broad-based. .

So they are all up on a year-over-year basis on a constant currency basis?.

Yes. The one that's flat at the moment is from projects ending and the pipeline that is in Holland that was... .

That was only one. But it did provide growth already last year. And Belgium, France and Spain are all growing. .

And then we have our small businesses in Sweden and Eastern Europe that are not materially -- or not material overall through today. .

Okay. And then based on the guidance that you were giving, I'm assuming that we should expect that at least within Europe, we should continue to see a build with regards to the profitability. .

Yes. .

The next question comes from the line of Ty Govatos. .

Just one question.

Where were the upside revenue surprises for you in the quarter versus the guidance?.

Actually, it came both from Asia-Pac and Europe. And we had a strong March so that was -- but it was pretty broad-based across those 2 big regions. .

Can you comment on what you're seeing in April?.

Well, I think part of it is that the trends or traction is continuing. You know we had quite a soft Q1 last year. So I think that we're careful that we're taking all of that into account. But so far, the traction we've seen in the first quarter and with a strong March is -- Q2 is -- or at least April, I'm sorry, is moving up and along okay. .

In fact, in the areas where we have more of the pipeline because there are projects that goes over a longer time, like RPO and talent management, we did enter Q2 with a strong pipeline, too. .

Your next question comes from the line of Andrew [indiscernible]. .

I wanted your commentary on the decision to engage Duff & Phelps.

And I was curious, why now? And is that sales process limited to the eDiscovery business?.

Yes. So currently, we are focusing only on eDiscovery both in the U.S. and in the U.K.

And as I have been praying always, we always look for opportunities, [indiscernible] to identify both where we should invest more in our core as well as alternatives for vis-à-vis [ph] less likely to be present significant opportunity for meaningful and profitable growth. And the way that why now rather than the before.

Well, yes, we had 2 reasons for that. One is mostly about eDiscovery, the other one is mostly about RPO. I mean, RPO is becoming a high-growth opportunity, and we are delivering great results. RPO today is the largest practice in gross margin trends in the Americas. It is probably selling 1/3.

2 years ago, eDiscovery was 55%, over half of our gross margins in the Americas. So it would be unconceivable 2 years ago to divest eDiscovery, now it is. And then the trends that we are seeing in the eDiscovery space are more of an integrated solution that includes staffing and technology.

We could have invested in building a technology solution, but we thought that those investment dollars would be paying off for Hudson more in RPO, recruitment and talent management.

And we think that our leading position in management review and staffing services in North America is a great value to somebody that has a complementary technology services. So I think this is the best of both worlds.

And also for our own people in eDiscovery, I think they will thrive in a different organizations that has both technology and our complementary staffing services. .

Okay.

So just so I'm clear, but the Duff & Phelps engagement is limited to the eDiscovery business?.

For now, yes. At this moment, it is. .

Okay. And then I agree with you. You looked like you have some nice growth coming in from recruitment, RPO and talent management. But the one kind of question mark that I have is on contract recruiting. It continues to be fairly low-margin.

I'm just wondering what your thoughts are going forward, given the competitive pressures it looks like the company is seeing there?.

Well, it's an important part of our business, especially in the market. And we will obviously find ways to be able to service our clients in an effective and profitable way. So I think that's just -- it's a challenge that we have to deal with and... .

And I like to make a specific point on that concerning the contracting business in RPO because, I mean, some of the margin analysis that you might do on contracting comes from contracting that we are doing through RPO that would decrease the average margin that you would see on an overall contracting basis.

So in RPO, we are mainly focused on delivering permanent recruitment. That's our core. And 90% of our placements and our business in RPO is based on permanent recruitment. But there are some clients, [indiscernible] clients that they want blended solutions. They want just one-stop shopping for both permanent and contracting.

So we will be serving those clients with contracting solutions. The margin in that contracting RPO space is much lower than what you would see in regular contracting business. But because that solution is built on top of an existing volume of permanent solutions for those clients, it's highly profitable for us. So the bottom line is good. .

Okay. Then I was also curious on the -- a little more granular detail on what exactly AlixPartners will be doing. .

Well, we started in the last few weeks. It's early stages, basically looking at the whole company. They're talking to executives now in Asia-Pac and in Europe. They have been in the U.S. and looking at corporate. So it's a comprehensive review of the operations.

They come obviously with a very professional approach and an insightful approach, and work continues. .

Yes. And I would add to that, I mean, we've done a lot of restructuring. I mean, we knew and we've been sharing in past earnings calls, we knew that our support cost structure was too heavy and too expensive. And the structure that comes from the original Hudson, which is the buildup of 67 boutiques run on a decentralized way.

And we've been creating shared services. We've been trimming our support. We were creating more of a regional approach than a dispersed country approach in the way we support the business. We've done all that. And we've saved about $24 million in support cost in the last 3 years. There is no low-hanging fruit in restructuring.

But the last phase is always the hardest. So we wanted to make sure that we have a deep view of the way we are organized, that we have the organization completely aligned to the practices and the business lines that we have identified as core so that they can grow.

And we want to do that with one of the best consultants in the market to help us go through this last phase. .

Okay. So do you see them as more focused on cost controls or revenue growth as their... .

Both. It has to be the right platform for both. We're not going to kind of shrink our path to success by just cutting costs. We need to have the right platform that is focused on the areas that can grow. And everything else, which is ancillary, should go away. .

Okay. And then as you articulated, there will be some pluses and minuses on the top line as we continue through this year, the drag being eDiscovery.

But with the positive trends that we're seeing in Europe especially, do you think it's possible to leave -- to exit this year with a positive aggregate top line on a year-over-year basis?.

Top line growth, yes, absolutely. And we've been starting to hire all those fee earners that, as I have mentioned, is 8% of our fee earners population just in U.K. and Asia-Pacific that we have loaded on the first quarter got our team to produce results on the second half of the year. .

Okay.

Just so I'm clear, so second half of this year, we expect it to demonstrate the year-over-year growth?.

Yes. Well, we are already... .

We have growth in Q1. .

Yes, already in Q1. .

We began to drive, as you said, at the moment is some of the... .

So Q1, in spite of eDiscovery going down, the growth in Asia-Pacific and Europe had compensated for the drop in eDiscovery for a total 2% gross margin growth. And in recruitment, talent management and RPO, we had double-digit growth only in Q1. Our guidance range in Q2 includes already possible growth in Q2. And we certainly expect to get it better.

Having said that, we need to continue being extremely focused on execution. We are in much better shape. We've got a strengthened leadership team. We have what we believe is the right plan to execute. We're concentrated on the core areas where we have more of a strength. We have all that.

But as we've been saying in the past, the difficulties remain on the execution and we cannot be distracted. We need to be very focused on executing on our plan. .

[Operator Instructions] You do have a follow-up question from the line of Mark Marcon. .

When is AlixPartners supposed to deliver their final recommendation? What's the timeline on that? And then how much do you anticipate that costing?.

I think the work will continue into May, maybe June, Mark. So I think that's this phase. And obviously, there's going to be a series of actions that, as a management team and with the board, we will be looking at. So I think it's early to say at the moment the financial impact [indiscernible] in 2014. .

I was talking more about just the discrete expense related to... .

Yes. So I mean, we've talked that in our press release. I think Stephen has also mentioned in his... .

Yes. It's in Q2, Mark, at the moment again at this stage. .

So in Q2 is the total $1 million including the cost related to the proxy fight as well as the strategic actions that we are doing. So that's how we have to traded on... .

Okay. So it includes -- so there's the proxy plus Alix's $1 million. .

So that's there. And also to be also more clear about the impact, we want to start executing actions so that we have already impact in 2014. .

Right, okay. And then with regards to -- you mentioned RBC briefly.

Did you say that the credit agreement is going to be terminated?.

It was expired in August of this year and won't be renewed, Mark, yes. So we are now in discussions with several of the banks, who have interest in replacing that facility. .

So the agreement that we had with RBS was with RBS Americas. So we were not dealing with RBS in the U.K. for this credit facility but with the RBS Americas. And in the Americas, clearly after divesture of eDiscovery, we have a pattern of clients that doesn't belong to the portfolio where they want to focus.

So as a fairly way, we will not be renewing in August and we'll have time to look for alternatives. We've already started to move and discuss with other banks, including the banks where we have our current bank facilities in Europe and in Asia-Pac. And we got very positive reaction from them.

So we are confident we will be able to get something pretty soon. .

Okay.

And then can you give us a sense on the eDiscovery business, what is the -- what's the current -- if you annualize it on a sustainable basis, what's the current revenue run rate and EBITDA?.

So on -- the revenue is probably $70 million to $80 million range and EBITDA is a couple million dollars. .

[Operator Instructions] And there are no further audio questions at this time. .

Thank you, Sun [ph]. And thank you, all, for joining Hudson Global's First 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. .

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