Jeff Eberwein - CEO Patrick Lyons - CFO.

Lee Lignos - Rubicon.

Good morning, and welcome to the Hudson Global conference call for the third 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 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 Securities and Exchange Commission including our annual report on Form 10-K, as amended. 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 quarterly slides, both posted on our website at hudsonrpo.com.

I encourage you to access our earnings materials at this time as they will serve as a helpful reference guide during our call. I will now turn the call over to Jeff Eberwein..

sales personnel, technology and marketing. We've made several key hires in the third quarter and expect to make more in the fourth quarter and into 2019.

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

In addition to these organic growth initiatives, we may also begin to look at profitable bolt-on acquisition opportunities in 2019 after we have finished building the platform for our new company.

Potential acquisition opportunities would need to be immediately accretive to Hudson stockholders, with an easy-to-understand business model and a clear value proposition. Turning to our stock buyback program.

We continue to view share repurchases as an attractive use of capital, and we expect to be more aggressive in repurchasing shares going forward. After the current $10 million authorization is completed, we expect to approve a new share repurchase authorization.

I'll now turn the call over to our Chief Financial Officer, Patrick Lyons, to review some additional details from the third quarter and talk about our guidance for the full year as well as our preliminary outlook for 2019..

Thank you, Jeff, and good morning, everyone. As a reminder, on March 31, 2018, we completed the sale of the recruitment and talent management businesses in Europe and Asia Pacific in 3 separate transactions and recorded a pretax book gain of $14 million related to those sales. Under U.S.

GAAP, the divestitures met the criteria for treatment as discontinued operations and are now reported as such in our statement of operations and balance sheet for all periods presented.

I would also highlight again that under GAAP, any previously shared corporate assets or support team costs do not get allocated proportionally between continuing and discontinued operations in the prior period numbers. But rather, the accounting is determined by whether the asset or support cost was included as part of the sale or retained by Hudson.

Under the sale transactions, most of the regional support costs and infrastructure in Europe and Asia Pacific transfer to the buyers. And thus, such costs are fully reflected in discontinued operations in the historical numbers, which distorts the year-over-year comparison at the EBITDA level.

Our year-to-date adjusted EBITDA includes $2.4 million related to the termination of several corporate executives in the first half of 2018 following the divestitures. Our stock buyback remains in place. And from inception of the stock buyback program in August 2015, we have purchased 3.6 million shares at a cost of $7.4 million.

Our third quarter tax provision from continuing operations was a tax charge of $100,000. We had no cash outflow for capital expenditure in the third quarter. The company used $100,000 in cash flow from operations during the third quarter. Days sales outstanding were 70 days at September.

We expect DSO to improve over the rest of 2018 and to trend in the 60s in 2019 as we complete the transition of back office services and the reassignment of client contracts to new Hudson RPO legal entities following the divestitures earlier this year. We ended the quarter with $38.9 million in cash and restricted cash and no borrowings.

We currently are in discussions with various lenders about the establishment of new credit facilities with a stand-alone RPO business. For the rest of 2018, we continue to expect to see double-digit growth in revenue over the prior year in constant currency.

At the gross profit level, we also expect to see growth in quarter 4 against prior year in constant currency. In September, we reached the anniversary of the loss of the large global client that we mentioned earlier and on previous calls so this will not impact the comparatives in Q4.

Our outlook on adjusted EBITDA from continuing operations for 2018 is as follows. We now expect RPO operations to deliver between $4 million and $4.5 million of adjusted EBITDA pre-corporate expenses versus previous guidance of $5 million to $6 million.

The reduction in guidance is due to delays on 2 new projects as well as the aforementioned investments we are making in technology, sales personnel and marketing. We expect corporate costs of $8 million to $8.25 million in 2018. The full year estimate includes the $2.4 million of severance that I mentioned earlier.

As a result, adjusted EBITDA from continuing operations is expected to be a loss of between $3.5 million and $4.25 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.

We expect that both of the transition work on our new back office and infrastructure will be completed by the end of this year.

Jody, could you please open the line for questions?.

[Operator Instructions] Your first question comes from the line of Lee Lignos of Rubicon. Please go ahead..

So a couple of questions, I guess, for starters. The revised guidance you gave for 2018, negative $3.5 million to negative $4.25 million versus a loss of, I guess, $2 million to $3.5 million that was given last quarter. Can you help us reconcile the differences there? There was a mention of some expenses.

Would love to just give a little bit more color in terms of the delta there.

And then also as a follow-on, what does that translate to as far as cash burn for the year?.

Lee, well, principally as we just mentioned in our comments, there are 2 factors. One is lower new starts project activity than we had previously expected, which has impact in the second half. And the second factor are the investments we're making for the long-term profitability of the business in both sales personnel, technology and marketing..

Okay.

And these are the same investments that were referenced on the last call, which I think Jeff alluded to around $1 million to $1.5 million, I believe?.

Yes..

Yes. Obviously, that was earlier stage. We're now actually executing, as Jeff mentioned, we -- in terms of the investment, we've actually started to make those investments including hiring additional sales personnel in Q3, and we expect more in Q4..

Okay, great. And I guess just talking about organic versus acquisitive CapEx.

Can you just kind of give us some of the considerations that you make? I mean, when I met the team in the past, I think the preference was that it's better to organically draw the business as opposed to acquire competitors because at the end of the day, you're acquiring people. But would just love to kind of get management's thoughts on that.

And then I guess with reference to bolt-on acquisitions, Jeff, you referenced easy-to-understand businesses.

Is it fair to assume these are businesses that are complementary with Hudson, their current business? Or is this something where you might potentially look to buy other businesses that aren't core to what Hudson does?.

Sure. This is Jeff. Several questions in there. To start with your last one, it would definitely be related. So the most obvious thing for us to look at is an RPO business. And our thought is that not to grow just for growth's sake.

But if we can add capability, scale and have a true 1 plus 1 equals 3 experience or value proposition for our clients, it could be interesting to look at. What we found is there's not that many pure RPO companies out there. And a lot of times, an RPO business might be embedded with some other related businesses like MSP or talent advisory.

And so the focus definitely is on RPO, RPO related. And if we were to be just slightly broader, some people define the space as HCM, human capital management. But I would just summarize it as RPO and RPO related. And your other question about organic growth investments versus acquisitions. The 2 aren't really mutually exclusive.

We're driven by what is the best way to maximize and grow stockholder value over the long term. We're very convinced that doing these internal investments in our RPO business have higher return on investment and are really good for our stockholders for us to make.

And we just wanted to make the comment, at the same time, we'll start to look at potential bolt-on acquisitions. But the 2 aren't mutually exclusive..

And Lee, just to come back to your -- I think, your first question, you also asked about cash flow. I guess the best way I'd answer that is if you look at our Q3 results, adjusted EBITDA was minus $300,000 with a cash usage of minus $100,000 from operations in quarter 3.

If you think about the guidance we have provided, the updated guidance for the full year on adjusted EBITDA, that implies an adjusted EBITDA fairly similar to what we just reported on, I think, Q3. Now from a cash flow perspective, we will have some additional cash outflow on the capital investments but again, fairly minor.

Offsetting that, I am expecting our DSO to improve as we go to the end of this year. So in terms of cash flow from operations, I'm -- I would expect to be fairly similar to the number we reported in Q3..

Okay, great. That's helpful. I appreciate that. I guess that kind of sets up the next question I have, Jeff. I think I share a view with a lot of shareholders, a frustration that management hasn't been as aggressive in repurchasing the shares, and I appreciate there's a lot of moving pieces.

And also you now purchase stock, but I think it's -- you purchased it at an average of over $2, and the stock is currently trading at $1.55. Definitely encouraging to hear that you plan to ramp up the buyback of stock. And I'm just curious in terms of why the hesitation over the last couple of quarters..

Yes, that's a really great question. And as an investor myself, it's -- you kind of want things to happen instantaneously like flipping on a light switch. And it doesn't always happen that way on this side of the table. And specifically what I mean is we had been buying back stock through a 10b5-1 plan so that it would just be on autopilot.

And it had trading parameters such that it was buying more stock at lower stock prices. So when our stock price was below $1.50 for example, it was in the market every day buying back the maximum that it could. Then we had the announcement of the asset sales, the sales of our legacy businesses in December of last year, our stock went up.

So it went above the threshold that we had set out in our trading parameters. And it hasn't really been back below those thresholds.

And to make a change to our 10b5 trading plan, there's a lot of criteria that have to be met because the whole purpose is you put it on autopilot, and it buys every day, and it's a safe harbor even if the company gets new information or whatever. So to change a 10b5-1 plan is not easy. The criteria are that the window has to be open.

And so for us, the window has not been open very often. And the board and management can't be in possession of any material nonpublic information. So it's just unfortunate that there's only a few times during the year that we're actually able to make changes to our stock buyback plan. Long-winded answer to your question.

But I'll just say, most advisers would say that the window opens 2 days after we file our 10-Q. So I believe we'll be able to change our 10b5 trading plan sometime next week. Lee, one question you asked I just wanted to elaborate on a little bit is the change in guidance.

And I think we've all seen situations where company lowers guidance, and it's kind of like cockroaches, there's never one, and one reduction leads to 8 reductions. I really don't think that's the case this time. I mean, in other words, our outlook for 2018 is no different today than it was 3 or 6 months ago.

So I don't think this lower guidance for 2018 really has any implications for 2019 or beyond. So I just wanted to get it out there..

[Operator Instructions] There are no further questions in the queue.

Gentlemen, do you have any closing remarks?.

This is Jeff. I just want to say thank you for -- to all the Hudson employees who worked so hard this year, both doing a good job for our clients and then also doing a good job for our stockholders.

There's been a tremendous amount of work going on under the surface, setting up all of our new structures, all of our new business entities, really cleaning up the company from the sale of our legacy businesses. So I want to thank everybody there. And thanks to the stockholders for your interest.

And thank you very much for joining us on this call, and we look forward to speaking with you again next quarter..

Thank you for joining the Hudson Global third quarter conference call. Today's call has been recorded and will be available on the Investors section of our website, hudsonrpo.com. Thank you..