Good morning and welcome to the Hudson Global and Star Equity Holdings merger announcement conference call. Our call today will be led by Jeff Eberwein, Hudson's Chief Executive Officer and Star's Executive Chairman. Mr. Eberwein is joined by Rick Coleman, Star's CEO, and Jake Zabkowicz, Global CEO of Hudson RPO. Please be advised that the statements made during the presentation include 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 the merger news release, merger deck, and the Form 8-K filed earlier this morning and in our other filings made with the Securities and Exchange Commission. The companies disclaim 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 and adjusted earnings per diluted share. I encourage you to access the merger presentation posted to both companies' websites at this time as it will serve as a helpful reference guide during the call. Please note today's conference call is being recorded. I will now turn the call over to Jeff Eberwein.
Thank you, operator, and welcome everyone. We thank you for your interest in Hudson Global and Star Equity and for joining us today. I'll start this call by discussing the transaction details and the benefits of the merger, and then Rick and Jake and others here with me will provide additional operations-related commentary. We will then open the floor to questions. As announced yesterday, Hudson and Star signed a definitive merger agreement, a milestone development for both companies. We're excited to announce this transformative deal, which will increase scale, diversify revenue streams, leverage corporate overhead and public company costs, all aiming to accelerate growth and create shareholder value more than either company could achieve independently. To summarize the logistics of the transaction, Star will merge with and into a wholly owned subsidiary of Hudson to form Newco via a stock-for-stock transaction.
Star shareholders will receive 0.23 shares of HSON for each Star share held. Hudson will also issue preferred stock with identical terms to Star's preferred stock to be exchanged on a one for one basis. Upon completion of the merger, Hudson shareholders will own approximately 79% of NewCo and Star shareholders will own approximately 21% of NewCo and will have an estimated 3.5 million shares outstanding after the deal closes pending regulatory and shareholder approvals. The merger is anticipated to close sometime in the second half of 2020. Now moving on to the benefits of the transaction, this merger creates a larger multi sector holding company with pro forma annualized revenue of over $200 million.
The improved stock trading liquidity as well as the financial advantages of higher market capitalization is expected to provide a better path to eventually getting this new company added to the Russell 2000 index, which would be a milestone achievement. We also expect annualized cost savings of at least $2 million within 12 months of completing the merger and that equates to $0.57 in incremental earnings per share. We believe a larger and more profitable company offers more options for growth by leveraging NewCo's strong pro forma balance sheet and the combined company credit strength will be able to more easily fund organic growth at our operating companies as well as procure better financing terms for bolt-on acquisitions or acquisitions of new businesses.
Finally, we believe NewCo offers an increased ability to raise capital for or monetize business units at private market values as opposed to being a pure play where the stock price can act as a ceiling on realizing value. We have ambitious growth goals for NewCo, including our target of reaching $40 million in adjusted EBITDA by 2030 and that's based on organic growth only. Given the expected increase in profitability, we expect NewCo to better utilize Hudson's sizable federal NOL than Hudson could on a standalone basis. As announced following the completion of the merger, NewCo would have four reporting segments: Building Solutions, which will be composed of Star's three businesses in this sector; Business Services, which is where Hudson RPO will be held; Energy Services, with our newly acquired Alliance Drilling Tools acquisition; and our Investments division.
All of NewCo's business segments will pursue organic growth opportunities as well as look for value enhancing bolt-on acquisitions. In addition, NewCo will be open minded about adding new business segments in the future. I would add that we're fortunate to have a highly capable management team leading our operations. Rick Coleman from the Star side and Jake Zabkowicz on the Hudson side. I'm going to turn the call over to Rick now to discuss Star's operations.
Thank you Jeff and good morning. Star converted to its holding company structure in 2019. Since then our goal has been to acquire attractive businesses either to complement our existing platforms or to establish new growth platforms. While we have completed and continue to work on various M&A initiatives, this transaction is transformative for Star. Star's shareholders will benefit from the combined company's greater scale, profitability, and stock trading liquidity as well as the financial advantages of increased market capitalization and the utilization of NewCo's substantial NOL. We look forward to leveraging all of these benefits to maximize shareholder value. In summary, NewCo will adopt Star's holding company structure, decentralized operating model, and the value-oriented acquisition strategy that we've honed over the past several years. I'll now turn the call over to Jake to discuss Hudson RPO's operations.
Thank you, Rick, and good morning everyone. We at Hudson RPO are thrilled to partner with Star to form NewCo. The scale created from this merger will enable Hudson RPO to invest more aggressively in innovation, technology, and delivery excellence. We're going to expand our reach and capabilities while maintaining our best-in-class quality of service. More importantly, we're going to operate with a structure that brings financial flexibility and strategic agility. Importantly, there will be no impact on Hudson RPO's day-to-day operations. We'll continue to operate with the same customer focus, people-first culture, and growth orientation as before. This concludes the prepared remarks session. Operator, can you please open the line for questions?
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Tate Sullivan with Maxim Group. Please go ahead.
Thank you. Good morning and thanks for having an update on. Congratulations. Jeff, you have good visibility into both companies in terms of achieving the $2 million of cost savings. Are there separate back office functions, so to speak, at both companies? Is it insurance costs, costs that you're saving on? Can you give more achieving that $2 million, please?
Yeah. Good question, Tate. Thank you. You know, I would put it in the category of we just do not need two of everything. So instead of having two audits, we will have one. As you know, there is a lot of costs associated with being a public company and that is very. Those are very specific things that we have identified that once NewCo is formed, when the merger closes, we will be able to eliminate a decent amount of things that would be duplicative. The ultimate cost savings could be higher than that over time. Those are the ones that we have identified thus far.
Thank you. My second one, if I may, is on the NOL. What you disclose on the Hudson NOL side, is that incorporating some of the Star NOLs or did those expire, or are they not applicable after a stock-for-stock deal?
Yeah. That's a good question. The Hudson, the number that we talked about was only Hudson's NOL, which we can use, which NewCo, which will survive, and NewCo can use to offset taxable income in the U.S. Star's NOL will be affected by the merger, and it gets very complicated. We can talk about that more offline.
But. Let's just say Hudson's legacy NOL is going to be plenty big for us to use for a very long time to come.
On Hudson on the staffing side, I think it was a conversation going with Hudson. Can you talk about the end markets? Can Hudson do any staffing work in the oil field services business or in modular construction in any capacity?
Yeah, that's another really good question, Tate, and it kind of ties in to your first question. We've at least for purposes of this presentation and right now we've only focused on readily identifiable cost savings at the public company level. We do think there's going to be many, many benefits of NewCo, including some revenue synergies and certainly when it comes to capital allocation, capital raising, doing any kind of deal with any kind of external outside party. Jake, why don't you take a minute just to discuss Hudson's business, the type of clients that we serve and how, just taking what Hudson does, how it could help other businesses within Star.
Yeah, no thanks Jeff, and great question. Hudson RPO, we operate in over 30 countries today, right? We have over 1,000 employees and we support tens of thousands of hires globally. Last year it was just over 50,000, which is fantastic. In a depressed economy, we support all sectors across the board. We are not sector specific. We have definitely strengths in the financial services technology and in the life sciences and pharmaceutical sector. We have the capabilities and skill sets to operate across the globe and really in any sector that our clients need us to support.
One of the exciting pieces of this and one of the synergies that we'll be able to see is surely as the NewCo company grows, as new opportunities happen, as businesses are acquired or expanding, we can help that expansion through finding great talent, whether it's great talent here, stateside or really in any country across the globe, we can help bring that talent quicker to NewCo and obviously leverage the best in class technology to be able to support that, whether soon to be launch Hudson Fusion technology or digital platform. We are really excited about the synergies, we are excited about the financial stability and the leverage that we'll be able to get from it. In the day to day, in the end, we will continue to operate as Hudson RPO.
As I mentioned before, there will be really no day-to-day changes that we will have in our operations.
Thank you all.
The next question comes from Bill Nasgovitz with Heartland Advisors. Please go ahead.
Yes. Hi, good morning. What is the shareholder vote needed to pass this proposal?
Yeah, that's a good question. As I understand it, the typical threshold for issuing more than, the typical threshold is if you're issuing more than, I think it's 20% of shares outstanding, you need shareholder approval. I believe that's a NASDAQ rule. In this case, because it's a related party transaction, because I am involved in both companies, we took the belt and suspenders approach of having both company shareholders approve the deal.
By what percentage?
I think it's just a majority vote for both companies. Is that your question?
Yes,
I think it's just majority vote.
Okay, I have another question.
Will you inform shareholders of any conflict of interest?
Absolutely, absolutely.
Yeah, we will be. The next step is we'll be filing a preliminary S-4 with the SEC. Look for that filing in the coming weeks. That'll be a very thorough document which will have background on the transaction. It'll describe all, you know, any and all conflicts of interest. Once that document is approved by the SEC, we can schedule the shareholder meetings and start soliciting shareholder vote at that point. I would point you to that document when it's filed for all of our required disclosures.
And when would that vote take place? When? What's your timeline?
You know, it really depends on the SEC review process. You know, we think it'll be sometime in Q3. That's our best guess at t his, at this point in time.
Okay, thanks.
Thank you.
The next question comes from Marc Riddick with Sidoti. Please go ahead.
Good morning, Marc.
Good morning. Morning. I wanted to maybe start with in the deck, the commentary around the growth goals, particularly the growing adjusted EBITDA to 2030. Maybe you could talk a little bit a bout, and that being organic-only growth. M aybe you could talk a little bit a bout some of the thoughts that are going into the growth goals that are set and maybe the contributions from each side.
Yeah, great, great question. We have some detail on l et me just find the slide with.
What the businesses have earned historically. If you go back to 2022, Hudson, yeah, slide 12 in the deck, you go back to 2022, which was the high watermark for the Hudson RPO business. It did hit approximately $100 million in net revenue and $20 million of EBITDA. On the Hudson side, we strongly believe we're on a path to get back to that level. It's just a question of when. We say interim goal there and that's just with organic growth. Why don't I pause there and have Jake elaborate on that for a minute and then I will, either I or Rick will speak about Star's businesses. Jake, can you talk about that interim goal? Go ahead.
Yeah, yeah. No, Jeff, definitely. Marc, good morning. How are you doing today, sir?
Good morning. Very well, very well, th ank you.
Yeah, nothing's really changed from our goal about, you know, when we last spoke, from the, from the last press release and the earnings call we had. You know, we still have a huge opportunity for organic growth across our current portfolio. And if you look at, you know, our land and expand strategy of increasing market share or our share of wallet and really that means our clients spend, we want to be able to provide more services to them, whether it be RPO or project based recruitment or executive search or our digital capabilities and offerings that we'll be launching here in Q3, Q4 of this year. We have a really significant opportunity to expand with our current clients, not to mention our geographical expansion. And as we continue to look at new countries, new areas that we haven't really supported in the past. Right.
Being able to offer that to our clients. You know, we have a lot of our partners today asking for those types of services where, you know, we put on pause. We've told them, you know, hey, we don't have that capability just yet. You know, as we continue to grow, I'm excited to say that we'll be offering that to them. We will continue to push that land and expand strategy on top of our new logo growth strategy. What will enhance all of that is our new digital offering. Right. As we think about where the market is moving in, talent acquisition is moving to more automation.
Right? Automation that helps create a better candidate and hiring manager satisfaction, you know, removes the redundancy of some of the stuff that, you know, people had to do before and creates a faster turnaround time for both the candidates, hiring managers and the recruitment team alike. When you combine all this, when you combine the operations, when you combine the efficiencies and economies of scale and the opportunity for expand on our current base, you know, we're really excited what the future holds for us.
Thanks Jake. And Rick, maybe can you spend a minute and talk about the growth plans that we have at Star's businesses?
Happy to do that Jeff. When we a couple of years ago sold our healthcare division, we embarked on a path to develop a skill set and the right capabilities internally to pursue mergers and acquisitions. Since that time we've acquired three different companies. One, Big Lake Lumber lumberyard in the Minneapolis area, Timber Technologies, glulam manufacturing company in Wisconsin, and most recently Alliance Drilling Tools. We're looking consistently for bolt-on acquisitions to add to those but at the same time we're working organically to expand the growth of those companies.
That happens geographically in some cases as we look to expand some of the skill sets that we've developed in the wood based construction arena particularly, but also as I mentioned, looking for new opportunities to take other companies in the same arena, potentially in the same geography and add them to what we've purchased. We know that all of the companies that we own have expressed the opportunity to grow through all of those different paths. We are excited about the future. We have plans, we have a portfolio and a register of different potential acquisitions and we believe we have the skills and, with the Hudson acquisition, more of the opportunity to pursue those acquisitions.
Great. I was wondering it might b e a little early for this, but. Is there sort of a general r ange o n the financial side as far as l everage, comfort and sort of how we should think about from a longer term perspective, managing the balance sheet going forward? Thanks.
Yeah, that's a good question, Marc. We haven't laid out a specific new numerical target. We do think with just being a bigger company, a lot more diversification in the revenue streams that just as a general rule a company like that can tolerate more financial leverage than any of the standalone parts could. But we're a conservative company. We're going to continue to be conservative and prudent. We're very focused on stockholder value creation and you know, leverage is something that, you know, used in moderation can be very helpful for growing stockholder value but it can be harmful if it's excessive. We'll be prudent and conservative.
Thank you very much.
Thank you.
The next question comes from Bill Nasgovitz from Heartland Advisors. Please go ahead, Bill.
Say Jeff, Hudson over the years has h ad a fair amount of cash on i ts balance sheet and you've been buying back shares. Are you burning cash today at Hudson and what is the level of cash today?
No, we're not burning cash. I think the most recent update we gave is the Q1 results. And if memory serves, we ended Q1. Hudson ended Q1 with approximately $17 million of cash and no debt. And, you know, if you look at 2024, Hudson might have had some small negative cash from operations, that we had some working capital adjustments. But for 2025, Hudson expects to generate positive cash flow from operations. And as you know, it doesn't have any CapEx. And historically, what we've done with the free cash flow is repurchase shares and look for bolt-on acquisitions, and we're going to be opportunistic. And both of those things are on the table.
Jake joined about 18 months ago, and what we have done since that time is two small bolt-ons in the Middle East to fill a geographic hole in our portfolio. Those were both very small transactions, less than $1 million, and we're continuing to look for opportunities. Both of those are good tools to use. Both bolt-on acquisitions and repurchasing shares are both good tools to use to grow value per share, particularly when the stock price is so low.
Thank you.
The next question comes from David Siegfried, a private investor. Please go ahead.
Hey, good morning.
Morning.
I understand the rationale behind the proposal. You know, it seems like in this climate, many companies are looking to simplify their story to new investors. To me, the crown jewel in all of this is the RPO business, which has a nice runway for growth. It seems like the story is being diluted and that the business units now have to compete for that same capital to grow, and I might say limited capital to grow. How would you appease or soothe RPO, Hudson RPO investors who got into this story thinking, you know, that the picture was maybe a little clearer, a little simpler to see.
Yeah, yeah, completely, completely understand that. You know, we love the Hudson RPO business, and it's just, to be frank, an unfortunate thing that is trapped inside of a micro cap. One of the dynamics that we talk about in the presentation is what we call microcap purgatory. You know, we've met with many shareholders, potential shareholders over the years, and a typical conversation is they get excited about the RPO business and then they look at the public company, the small market cap. It's a very, very illiquid stock. There's been a lot of people who just haven't ever bought our stock because it's illiquid. Then people say, why is your stock so illiquid and it's because no one's buying it. It's a circular reference and that's why we call it microcap purgatory.
This is a way to break out of that. I do understand that for someone that wants 100% exposure to Hudson RPO, that is somewhat diluted. The Hudson shareholders will own, I think it's 79% of NewCo. This is going to be beneficial for all of the company, all the businesses inside of NewCo. Hudson RPO will have a lot more flexibility to grow and just a much brighter future as part of this larger multi industry holding company. I also hear your point on being a pure play versus being multi sector. I think that is true at a certain market cap level. Once companies get to a certain size, and hard to quantify exactly what that is, but I would say it's probably somewhere in the billion market cap range.
Maybe it's as small as $500 million market cap range, it does make more sense to be a pure play. If you look at hundreds if not thousands of microcaps that exist out there, I think we mentioned in our presentation below $250 million market cap, which is kind of the Russell 2000 threshold, especially companies below $100 million and both these companies, a lot of them just shouldn't be public. They have stocks that barely trade. It causes them to be traded at a significant value discount. We have long felt at Hudson that the public market just, there's a big disconnect between the intrinsic value of the Hudson RPO business and what the stock price is trading at. This is a way to get to a better path for both companies and both stocks.
We strongly think this is going to create much more shareholder value as a combined company than what either company could do on its own.
Okay. Yep. Thank you.
Good question.
As a reminder, if you would like to ask a question, please press Star then one to join the question queue. The next question comes from Al Hill, a private investor. Please go ahead.
Hey, could you reply again on the how the dividends are going to be affected?
Yeah. So of the three securities, the only one that pays a dividend is the Star Preferred stock and they'll be completely unaffected. The Star Preferred stock will continue to pay dividends. Star just issued a press release earlier this week on the payment of the Q2 dividend. The Star Preferred stock will continue to pay dividends on its regular order, just like it always has. Once Newco is formed, for every one share of Star Preferred stock, there'll be one share of NewCo Preferred stock. It'll be an identical security. The dividend will be identical. Bottom line is nothing will change on that. On a side note, Star has found that there are some sellers of businesses, whether it's a private company or potentially a public company, that actually like receiving the preferred stock, especially if they're close to retirement.
It can be a very tax efficient security to receive and that is something that is possible to use for Hudson's businesses. We could find an acquisition target, for example, and we think, we've long thought that the Hudson stock is too cheap to issue to potential targets, but we could issue those targets preferred stock and that isn't really dilutive to the other preferred stockholders because the dividend is going to be the same no matter what. We think having more shares out and more, more trading is a good thing for all of the preferred shareholders. Nothing's pending on that, but it's just an additional tool that we'll have in the toolkit to grow the company.
Okay, and once again, why, why the. New name Newco NEWCO?
Yeah, that's just a placeholder.
Okay.
We'll pick a name and ticker symbols, but we need NASDAQ approval and maybe some other approvals, so just stay tuned on that.
Okay,
that's just a placeholder.
Okay, got it. That's all I have.
Thank you. Good questions.
The next question comes from David Siegfried, a private investor. Please go ahead.
Hey, thanks for taking my question again. Jeff, this was said with all due respect, but, you know, it seems like, you know, your economic interests are more in line with preferred ownership rather than the common shares, which, you know, I'm just a common shareholder. Would you be removing yourself from this vote given the conflicts that are in place?
Yeah, that's it. That's a good, good question. Both boards met yesterday to vote on the transaction. I would encourage you to read the S-4 when its filed. That will have the whole background. This transaction was initiated by me, proposed by me to both boards, but then after that I had no involvement. Each board formed a special committee, had independent outside legal and financial advisors who evaluated it. Both boards unanimously approved entering into their merger agreement. I recused myself. I abstained from voting on both of those votes. That happened yesterday. When it comes to the preferred stock, no vote is necessary.
For every share of preferred stock that exists, it'll just roll into Newco, and then the shareholders of Star will have a vote and the shareholders of Hudson will have a vote, and we will follow the rules that are required to see if it passes or not. I would say I think owning both securities is not a conflict of interest. It is public knowledge, if you look at my Form 4 filings, I have never sold a share of Hudson common stock. I have never sold a share of Star common stock. I have been a buyer of both stocks over time, and I expect that to continue.
Okay, thank you.
Thank you.
Once again, if you would like to ask a question, please press star then one to join the question queue. This concludes our question and answer session. I would like to turn the conference back over to Mr. Eberwein for any closing remarks.
Thank you all for joining us today. We look forward to updating you regarding the merger process in the coming weeks. I'd like to emphasize that both boards will recommend to the shareholders of Hudson and to the shareholders of Star a vote for the merger at the shareholder meetings to be held later this year. We believe this is an accretive combination that increases scale, diversifies revenue streams, leverages corporate overhead and public company costs, and better positions both companies to maximize shareholder value. On the Star side, Rick and I and others are available to answer any questions you have. On the Hudson side, Jake is available to answer any questions you have on the business. I can answer questions on anything related to the stock or capital markets or investor relations.
Both companies have updated their websites with the new presentation, and we look to giving you updates in the future. Thank you for your time today.
Thank you, everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.