Jeffrey Eberwein - CEO Patrick Lyons - CFO.

Analysts:.

Good morning and welcome to the Hudson Global conference call for the second quarter of 2018. Our call this morning will be led by Chief Executive Officer, Jeff Eberwein; 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 security laws. Such forward-looking statements involve certain risk and uncertainties that may cause actual results to defer materially from those contained in the forward-looking statements.

These risks are discussed in our Form 8-K filed today and in other filings made with Securities and Exchange Commission including our annual report on Form 10-K as amended. The company disclaims any obligations to update any forward-looking statements. During the course of this call references will be made to non-GAAP terms such as adjusted EBITDA.

An adjusted 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 material at this time as they will serve as a helpful reference to guide during our conference call. I will now turn the call over to Jeff Eberwein. Sir, you may begin..

sales, technology, and marketing. Unlike bricks-and-mortar businesses that get to capitalize their investments, investment in a people-oriented services business like ours get expensed right away.

The investments we're making in RPO may suppress results somewhat in the short-term but we believe they will drive growth and profitability in the medium-to longer-term. These investments are minor, not major and we believe they will have quick paybacks.

I'll now turn the call over to our Chief Financial Officer, Patrick Lyons, to review some additional data points from the second quarter and talk about our guidance for 2018..

we continue to expect RPO operations to deliver between $5 million to $6 million of adjusted EBITDA pre-corporate expenses. We expect corporate costs of approximately $8 million to $8.5 million in 2018.

The full-year estimate includes the $2.4 million of severance that I mentioned earlier, which is partially offset by expected savings from lower ongoing compensation and professional fees in corporate. As a result, adjusted EBITDA from continuing operations is expected to be a loss of between $2 million to $3.5 million for the full-year 2018.

As Jeff mentioned, we expect that the growth in RPO and lower corporate costs will position us for profitable adjusted EBITDA in 2019 as we transition this year to become a pure play RPO provider with a new simplified operating platform.

Candice, could you now open the line for questions, please?.

[Operator Instructions] I'm seeing our first question from Lee [ph] with Rubicon Capital Group..

Thanks for taking my call. Just wanted to get your thoughts after, I guess, now that you have a full quarter minus the other businesses, just kind of an update on, I know you've been doing some work on talking to different people within the organization.

Can you just, kind of, give us a sense of what you're seeing, what you're hearing, what you think the opportunity is, I guess for pipeline, and I guess incremental business over the next year or two?.

Sure, we have a robust pipeline. We just went through, Patrick and I did with each region their outlook and their pipeline and it's pretty exciting. And we're also working together as a global team better than we ever have before, I believe.

We have a lot of instances where we'll win business with a client in a region and then start to expand that relationship over time to other regions.

And like I mentioned before, we're particularly strong in life sciences, financial services, consumer, and we also do some business in manufacturing industrial technology and we're seeing a lot of hiring growth at our existing clients.

And there's a lot of exciting potential new clients in the pipeline and we have to convert those to sales and we're working very hard on that, but the outlook is bright..

So I guess when you talk about the conflicts of the group and the industry and the company, you're -- I think just to reiterate what you said, you think revenue gross margin should grow 10% to 15% annually?.

That's right. I mean, the industry experts, consultants, forecast RPO as an industry to grow 10% to 15% per year over the coming years.

And so just theoretically, if our market share is constant, we should grow at that same rate and we have a goal, a challenge, a target to grow faster than the market, but that was a an illustration of what our growth should look like if those projections and forecasts pan out..

So you think there's an opportunity to actually grow faster than that with market share gains?.

Right, there is that opportunity and we have to execute..

I guess to that point with regards to growing the business it sounds like your preference is to organically grow and bring on new sales people et cetera.

Can you elaborate on that in terms of how much money do you think that would spend as a cost rather roughly?.

sales, technology, and marketing. And some of that is to keep up with the market, but it's also to drive that growth potential to where we could potentially grow faster than the market. And when I said these are minor investments not major investments, it's less than $1 million a year and like I said, they should have quick paybacks.

So if we hire a specialized sales person who's a good hire it's hard to expect a lot of payoff from that investment in that person in the first six months, but we should definitely see it in the next six months. And within a year, it should be really -- a real productive investment..

So it sounds like it's really just a couple million dollars here and there just to grow the sales organization and I guess just to modernize the IT and that kind of thing?.

Yes I would say, less than $1 million a year..

I guess in the context of growing the business you did mention, and thanks for the color with regards to the corporate costs next year and it sounds like you've got trending in the right direction. You did mention that you think EBITDA might be able to grow faster than that 10% to 15% target of revenue and gross margin growth.

Can you give me a sense, I guess, as you scale up the business -- and it's my understanding that your business currently is subscale? What is the margin expansion or, I guess, the normalized margin opportunity for this business? I mean, you're doing roughly about $70 million, $75 million run rate revenue, what is -- what do you think a normalized margin would be and how much revenue would you have to generate to get to really kind of a full normalized EBITDA margin?.

Yes, so that is a really great question and we're giving specific guidance for 2018. And for 2019 and beyond, it's more that we're giving some framework as to how to think about it. Not really giving specific guidance. And so my comment was kind of more theoretical and high level in nature.

Just in the sense that we do have variable costs and fixed costs. And I would say, this is true of any business, that if they have some fixed costs as they get larger and get scale we should see some leverage, because we're effectively allocating those fixed costs over a larger revenue base.

And so it just follows from that that if we're -- that our EBITDA growth rate should be faster than our revenue and gross margin growth rate. Patrick can....

Can you give me an order of magnitude, I mean is it like 2x the growth rate of the gross margin?.

It's probably not that high. We do have quite a bit of variable costs in our structure..

At this stage Lee, we don't want to get into providing specific guidance for 2019. I think we have a little bit more work to do and as we get later in the year and build our strategic plan for 2019, we will be happy to give some more detail on 2019.

But yes, we will be typical in our business that as the business expands, grows, as the top line grows, EBITDA would normally grow faster than the growth rate on revenue and gross margin.

And in addition, in our case as we've emphasized in this call, we are later focused on the corporate costs as well, so that obviously helps to have a higher growth rate on EBITDA compared to the top line..

I guess just putting together the variables that you provided, I am assuming that EBITDA just grows 10% to 15% and corporate costs are cut in half, it's possible that the business can generate at least $3 million next year of EBITDA and probably more and the enterprise value of the business is $15 million right now.

I'm just really curious given all of that and given the cash balance you have, it doesn't seem that there's a huge outlay of capital [indiscernible] organically grow the business. Just curious why you haven't been more active in buying back the stock, I noticed that between the two quarters you bought 2,200 shares.

I'm just curious what your thoughts are, I know there was a board meeting and I wonder if you had that board meeting and what the conclusion was there..

Sure.

So when I became CEO, which was about four months ago, and talked to the board about what our priorities were, we came up with three things that are all very important, but the first two were more urgent and the first one was to really spend time getting immersed in the RPO business, doing everything we could to help maximize the growth and margins and performance in that business.

And so that's been a big area of focus. And then second area of focus has been our corporate costs and we have started to make some changes there and more reductions are coming. And then, the third one is also very important, especially over the long-term which is strategy, capital allocation, as you mentioned we do have a cash balance.

And we are coming from an open minded position where all options are on the table to achieve our mission of growing stockholder value over the long-term. So we will be more articulate on the path forward and a plan in the future..

I will just add one final comment and given the outlook and strategy and there's definitely -- seems like things are turning in the right direction in terms of rightsizing the business that you can parse out, I'm just not sure your stocks going to be $1.65 for much longer, so I would strongly suggest that you consider buying back stock at these levels.

And obviously we got that and I appreciate your time..

Sure. And we appreciate your interest and your questions and I might have mentioned this before, but I do think it's important to pay attention to what companies do in addition to what they say. And we did put in place a stock buyback program a few years ago and I think we bought something like $7.5 million approximately on a $10 million plan.

And so we have bought back a sizable amount of stock relative to the size of our company..

[Operator Instructions].

So, Candace I have a an answer to a question that was e-mailed to us. And we encourage stockholders to e-mail us questions if they like for us to answer on the call.

And the question that was e-mailed to us is, is there a headwind for Hudson in winning new RPO clients because you do not offer a bundled product like many peers? And the way we would answer that is kind of depends on what one means by a bundled product.

With the traditional recruitment business, we don't see that bundled with RPO and we did not, historically, do a bundled offering with our agency businesses and our RPO business. And we actually think it's very helpful to be separate from the recruitment businesses because it reduces any conflicts of interest.

And we have a much clearer go-to-market strategy just by being a pure play RPO. Another thing that people talk about when they talk about bundled products is to combine management of temps in addition to RPO and we do that for our RPO clients.

We don't typically do that temp contract type of work as a standalone business, it's more that we do it as a complement to our RPO business at the request of clients. And we do have a breakdown of our permanent and temp businesses in our 10-Q and also in the earnings slides..

Okay and I'm showing no questions in the queue. Thank you for joining the….

Go ahead, Candace..

I am sorry. Thank you for joining the Hudson Global second quarter conference call. Today's call has been recorded and will be available on the investor section of our website hudson.com. You may now disconnect..