David Kirby - IR Stephen Nolan - CEO Patrick Lyons - CFO.

Steve Cole - Mangrove Partners Fund.

Good day, ladies and gentlemen, and welcome to the Hudson Global Fourth Quarter 2016 Earnings Conference call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the call over to Mr. David Kirby.

Sir, you may begin..

Thank you, Chelsey, and good morning everyone. Welcome to the Hudson Global conference call for the third quarter of 2016. 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 the 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 on our quarterly slides, both posted on our website at hudson.com. I encourage you to access our earnings materials at this time as they will serve as a helpful reference guide during our call.

As we give you the full year 2016 results, please remember that we did exit a number of business in 2015 that are now classified as discontinued operations and thus are part of the prior year reported results.

We have provided a reconciliation from reported to retained revenue and gross margin in the press release and we'll refer to both sets of numbers. Retained revenue and gross margin exclude all businesses sold or exited in 2014 and 2015. With that I'll turn the call over to Stephen Nolan..

Thank you, David and welcome everyone and thank you for joining us today. For the fourth quarter we reported revenue of $100 million, just about flat to Q4, 2015 in constant currency and right in the middle of our guidance. Reported revenue was negatively impacted by a $5.4 million FX reduction, due largely to the weaker UK pound.

Gross margin for the quarter was $43 million flat to last year in constant currency. Recruitment gross margin was slightly down with perm growth of 2.6% offset by temp contracting which was 7.7% lower. Gross margin in our RPO business was down 4.7% while talent management grew 8%. SG&A costs were $42 million or 1% above last year in constant currency.

At quarter end we had 1173 fee earners, 7% below last year. We reported an adjusted EBITDA profit of $900,000, about $450,000 below last year. Improvements in Continental Europe and corporate expenses were offset by weaker results in Asia and the UK.

Turning to regional and country performance in the fourth quarter; America's Q4 gross margin grew 5% with growth at new and existing clients. SG&A costs were slightly higher due to investments in sales and delivery people and a tough comparison to a noisy Q4, 2015 due to the finalization of the new back office structure.

Asia-Pacific had a mixed fourth quarter with year-on-year growth in revenue of 8% while gross margin was down 6% in constant currency. In our recruitment businesses in Australia and New Zealand, we saw strong revenue and gross margin growth of 27% and 7% respectively.

In Asia recruitment, gross margin fell 25% with weaker trading in China and Singapore offsetting strong results in Hong Kong. For the region, gross margin in temp recruiting grew 13% while perm fell 13%, which resulted in an overall 6% drop in recruitment gross margin.

Q4 gross margin in RPO was down 11% with lower client demand in Australia, Hong Kong and China, while talent management grew 10% with strong performances in Australia and China. In Europe we saw gross margin growth on a year-over-year basis in Continental Europe offset by weaker results in the UK.

At the region level gross margin was up over 6% with strong growth in perm and talent management, offset by lower temp contracting. In the UK, gross margin fell 11% mainly in our recruitment businesses in England and Scotland.

We have seen a reduction in demand in a number of markets especially in temp contracting at some large financial services clients. On a positive note perm recruitment grew nicely in Q4.

We continued to focus on adding new clients and specializations and leveraging our talent management and marketing resources and are seeing some good progress but it will take some time.

Continental Europe delivered strong gross margin growth across all markets of 20% with excellent performances across all businesses in Belgium, up 16%, France, up 35%. Spain grew 9% and Poland was up 28%. Looking at our performance for 2016 full year on a retained basis in constant currency, we grew revenue by 1.5%.

Overall gross margin was slightly down with 15% growth in Continental Europe, 7% growth in both Australia and New Zealand and the Americas, offset by weaker trading in Asia and the UK. I was delighted to see that 9 of our 12 markets grew their businesses in 2016.

For the year, RPO gross margin grew 5%, talent management grew 6%, temp contracting was flat and perm was down 6%. Excluding the arbitration settlement, our full year 2016 adjusted EBITDA was positive and over $3 million better than last year.

For 2017, we expect continued progress in our core markets and practices and to deliver another profitable year 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 from the fourth quarter, as well as our first quarter outlook..

Thank you, Stephen and good morning everyone. We incurred $600,000 in restructuring charges in continuing operations in the fourth quarter, mainly for our real estate action in London. For all of 2016, we incurred $1.6 million in restructuring charges, down from $5.8 million in 2015.

We purchased 143,000 of Hudson shares in the fourth quarter at a cost of $200,000. From inception of the stock buyback program in August 2015 we have purchased 3 million shares at a cost of $6.5 million. Our fourth quarter tax provision for continuing operations was the tax benefit of $500,000.

The fourth quarter tax benefits includes the release of valuation allowance on the deferred tax assets related to Australia, offset in part by evaluation allowance on the deferred tax assets on our UK book. For the full year 2016, our tax provision was $700,000. Capital expenditure was $900,000 in the fourth quarter and $2.8 million for the full year.

We expect approximately $2.5 million to $3.5 million of CapEx for the full year 2017. Cash flow from operations was positive $5.6 million in the fourth quarter.

For the full year 2016, we used $9.4 million cash in operations, which included some items that we don’t expect to recur or will be smaller in 2017, including $4 million in cash for restructuring actions and $3.8 million in cash used for the settlement of the arbitration claim in the first half of 2016.

In addition for the full year 2016, we paid a total of $3.4 million in dividends and paid $5.1 million for the repurchase of Hudson shares under our buyback program. We ended the year with $21 million in cash and $19 million in available borrowings, totaling $40 million in liquidity.

We had $8 million in borrowings on our credit facilities at the end of the fourth quarter all in Australia to support the significant growth we saw in our contracting business in 2016. Days sales outstanding or DSO, was 47 days, flat to last year and two days below September 2016.

Looking to the first quarter and using our protected average exchange rates for the quarter, we expect the revenue range of $95 million to $105 million. Reported first quarter 2016 revenue was a $101 million, which translates to $98 million at constant projected FX rates, mainly due to the weaker British pound.

Our first quarter 2017 revenue guidance therefore ranges from down 4% to up 7% in prior year in constant currency. Regionally, we expect Asia Pacific revenue will be above last year in constant currency, with continued year-over-year growth in temp contracting somewhat offset by weaker perm performance in Asia.

We expect adjusted EBITDA to be better due to higher gross margin. We expect Americas revenue will continue to grow in Q1, with positive momentum across most clients, adjusted EBITDA should be up from 2016.

In Europe, we expect revenue to be lower than prior year, due to continued challenging trading conditions in the UK, especially temp contracting out of the national services clients. However we expect that adjusted EBITDA will be flat to slightly improve than prior year due to continued strong results in Continental Europe.

In total, for the first quarter, we expect adjusted EBITDA to be in the range of $1.5 million loss to a $500,000 profit, which compares to an adjusted EBITDA loss of $2 million a year ago. Chelsey, please open the line for Q&A..

Certainly. [Operator Instructions] And our first question comes from the line of Steve Cole with Mangrove. Your line is now open..

Good morning, guys, appreciate the commentary. I guess what I'd like to do chat a little bit about in the last several years, obviously the company's taken a number of restructuring actions and streamlined the business.

I guess what I’m more curious is where are we in that process today, as we look to 2017 and beyond? Are there other measures that will need to be taken, number one? And then number two, how does this model actually manifest itself on a steady state basis? So when do we get kind of looking at straight GAAP earnings and margins that we can look at and kind of bypass the adjusted EBITDA?.

Hi, Steve, this is Stephen Nolan, the CEO, and welcome. I would say on the restructuring actions the impact in 2017 will be really just cash, going out to pay for either some prior actions like on real-estate reductions or things like that.

So it’s become less noisy and just a cleaner sort of business, I think as we focus on the market rent and in the practices now that we really want to invest them. I think we’re a lot closure to cleaner numbers now, I think with the disposals and some of these restructurings behind us.

And as I said in the call, we are now seeing growth in most of our markets. We have good pipelines, we have good market activities going on and I think the key now will be translating that into gross margin on a lower G&A base will produce positive results..

Okay.

So if we look at - I know obviously that you mentioned as we look out you are looking for a better outlook as we get into ‘17, but what is - have you guys come out and again I’ve been around this for a number of years and I know the industry well, but I’m just curious what is your - if we had a slide for example that looked at kind of your business model, what is the margin range, where this is going to end up.

So the EBITDA range that you want, both to key in on, and the gross margin profile across the different businesses in aggregate that we can kind of see where this is going to go?.

So I think we breakout in the earnings slides, our composition of our gross margin and our revenue. And certainly those there's a different profile in perm of a 100% gross margin from temp contracting, roughly about 15%. And then talent management and RPO are quite high. Again it sort of varies on the type of the work that we are doing with clients.

So our average have been around 40% [ph] in aggregate but we certainly see a lot of very, very good opportunities in RPO and talent management. And we have been investing in those. Temp contracting is one - my background is Adecco, so certainly I’m comfortable having a contracting book of business.

You just have to make sure it’s on a gross margin percent and a cost impact that's not hurting. And then perm, it’s a mix of contingent in perm and the temps [ph] across the world and it can be bumpy sometime. So I think we now have a mix of business that we had for last year or two.

We are very focused on the opportunities in some of the markets where we’ve been expanding. So I think that's the main focus around the gross margin. In terms of the EBITDA, it has been a journey and I think we are - we are not really giving guidance yet on our full year number, and our present.

But the trend and the momentum has been towards more positive numbers and obviously we know we still have work to do to get up to probably expected levels..

And last question is, do you guys look - from a cash flow perspective this year, the effectively positive cash flow from operations and free cash flow for ‘17?.

I think, look we have a seasonal business. So we will see some weakness in Q1 and then we start to see some uplift in Q2. Q3 is bit soft in Europe. Over the year, yes, the answer is we expect to have a positive cash flow from operations..

Okay, thank you very much..

You're welcome. Thanks for the questions, Steve..

Thank you. [Operator Instructions] And our next question comes from the line of David Sacks with Hockey Capital [ph]. Your line is now open..

Good morning. Could you comment a little bit about the outlook in 2017 for RPO and talent management to the extend there have been any account wins and what kind of organic growth potential do you see in those businesses in 2017? And maybe you can comment a little bit about retention of your core base there as well, thanks..

Hi David. Thanks for the question. As we have tried to say over the past calls it can be a bit of lumpy business in RPO and talent management, talent management around certain projects that we're helping clients with. RPO and talent management both have good pipelines at the moment.

We've had some wins towards the end of 2016 and into early '17, that we will be - we will start to see coming through the P&L over this year. Retention of clients and key people is good, and we are also leveraging, I would say in some markets where maybe it's not so strong at the moment.

It's a differentiating offer we have in UK, where it's such a competitive market and to be able to go out to client and talk about not only recruitment but how it, from the talent perspective, talent - how you find the best people to fit.

All those tools that we have available we're leveraging that more and more now to help our recruitment businesses grow. So I think it's - we are, I think we see a good year ahead for RPO and talent management in 2017. And the teams are doing a super job filling the pipeline and implementing and delivering. So expect that to continue..

And have you found your size in talent management to be in impediment to your ability to - not talent management. Our size [ph] is an impediment to grow that business? Are you - you are starting essentially from a zero base or near zero base in the US and the business has now scaled up a little bit.

Is that been a hold back in terms of winning new business size or if you've been successful based on your skillset and relationships and what's the secret sauce if you will?.

I can't tell you the secret sauce. Our approach has been in certain context to have a land and expand. You come in and you do a project for a client, you build up a reputation and then they start to get the good word out there and you're - so we have a fairly large American client, needed some help in Middle East.

We helped them with that and then we moved on to Eastern Europe and now we are talking about the US business. On the other hand we have businesses that we've been dealing with in the US, who needed in UK. And we've been leveraging RPO skills in both geographies to help our clients fit with their need.

So we see it as a - that the - there is three very strong operations in the Americas in Europe and in APAC.

There is very good collaboration and there is a lot of clients that are brand name client but you would know where we still winning business, with expanding within existing clients and we're getting a lot of activity around pitching and wanting to talk about not only our RPO but the broader level of how we help as well with the talent discussions which many clients are - companies are struggling with..

And I recognize your commented that the business is lumpy, but if you look at over a number of years is this - if you look at RPO, is it a business that can grow in your mind double digit on the gross margin line for the next three to five years based on kind of the existing client base in place plus your historic win rates?.

I don't know if I wanted to put a particular number on it David. But I think what we've shown is that we've been able to grow this business very nicely over the last number of years, and 14% in '14 11% in '15, it's 5% this year.

So thing is going to be that if certain clients are just not going to be in sort of an aggressive or hiring pattern, an example we have is a very large consumer products company in the UK is now in a merger discussion with another company. And they are just - they're holding off.

So there is certain activity that we would have expected in the fourth quarter that didn't come. It will come back again once the thing gets sorted out.

So I think the history is there, I think we understand why we have certain periods of time when the hiring activity just is not as strong and it's about keeping your relationships and just keep looking for the opportunities there.

So again I don’t want to comment going forward on what our expectations are around the growth rates, but that’s the gist of what we seen and what we continue to focus on..

And last question, kind of tailing on the previous callers comment, you were downsizing in the restructuring efforts that you’ve put in place. Are those now complete for a company that’s call it $400 million in revenue as you right now, or is there still room to remove regional or a corporate expense or shrink your non-revenue generating footprint..

Patrick, do you want to take that..

Yes sure, I mean we will certainly continue to be opportunistic and identify areas to remove costs. We continue to do that. Certainly in 2017 we see that more being done. We are in normal day to day operations rather via a sort of a large restructuring program.

So in 2017 at this stage probably what we will see in terms of restructuring will be more just true-ups in previous actions. As I mentioned during my prepared remarks we had about $4 million cash out in 2016 and restructuring. At the end of 2016 that’s our balance sheet is $2.8 million two of which will be cashed out in 2017.

So again we would expect the restructuring amounts to certainly come down, but in the mean time we will continue to take costs out of the business and certainly there are opportunities to take further costs out at both the corporate level and at the local level as well..

Thank you. And we have a follow-up question from the line of Steve Cole with Mangrove. Your line is now open..

Hi guys, just a quick follow-up. I am sure it's not lost on you folks the stock price were kind of tracking in multi-year lows and then I know you - I think the bought back a piece for $1.20 here not too long ago.

I guess what the window, as it opens up, would one - would it be right to assume that the management and the board is just considering whether a check box open ready to buy every share that’s available here at $1.08 or why would we not expect to see a broader participation across the management lacks and the board where the stock here as we follow [ph]?.

All right. Steve, thank you for the question, yes we definitely acknowledge that the share prices are a lot [ph] we believe under values this company.

So I think there is a lot of progress we have made and we are tried a number of shareholder initiatives in terms of returning some of the cash that we had brought in from the sale of businesses, while also investing in our core.

I can’t really comment on what’s going to happen once the window opens but we take your point and thank you for your comment..

Okay. Thank you very much..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. David Kirby for any closing remarks..

Thank you, Chelsey and thank you all for joining Hudson Global's fourth quarter conference call. The call has been recorded and will be available on the Investors section of our website, hudson.com later today. Thank you. Have a great day..

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