Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the inner workings incorporated quarterly earnings call. At this time, all participants are not listen only mode. After the speakers presentation, there will be a question and answer session.
Participating in that portion of the coal just start and want to get into Q.
Please be advised to today's conference is being recorded.
No. It's my pleasure to turn the conference over to your host Bridget Freas.
Good afternoon, and welcome to our fourth quarter and for your 2018 earnings call. Joining me on the call today are registered a chief Executive Officer, and John Peterson, Our Chief Financial Officer.
We issued a press release with additional information earlier today, which is available on our website www Dot I end up UK dotcom leased out. This call will include forward looking statements relating to future results that are made pursuant to the safe Harbor provisions of the federal Securities laws.
These statements are subject to a variety of risks uncertainties and assumption that may cause actual results to differ materially and those stated or implied by the forward looking statements additional information concerning these risks uncertainties and assumption is contained.
As you see filings, including the risk factor section contained in our most recent form 10-K.
Any forward looking statements represent our views only as of today you should not be relied upon as if any subsequent date.
This call will discuss among other financial performance measures adjusted EBITDA and adjusted diluted earnings per share. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP measures the most comparable GAAP measures.
This call is intended for investors and analysts and may not be reproduced in the media and or in part without her parties that I'll now turn it over to rich.
Good afternoon, and thank you for joining us.
I'd like to open by addressing pulpit 19.
Primary concern is the health and safety over our colleagues customers and partners were impacted by this pandemic.
We initially felt the impact in Asia Pacific, where we have about 100 employees in China and Hong Kong.
Now our employees all over the world are taking additional precautions many of whom are now working from home.
Thankfully, we're not aware of any employee who is contracted the virus at this point.
We're also watching carefully for the impact this hope crisis will have on our business.
Well, we generate very little revenue within China, and the other countries hardest hit our topline is affected by the marketing spend of our global clients, which will likely be impacted by these events.
Moreover, we do source materials from Chinese suppliers to serve clients around the world.
Most of these suppliers temporarily halted manufacturing.
Many of them have restarted production recently.
Our account teams have been working diligently to adjust sourcing needs to minimize the impact on our supply chains and try to ensure allpoint deliverables are met.
Our financial guidance for 2020 reflects our base plan pre cobot 19.
Well, we have not seen material cancellations of orders to date, we are seeing some timing shifts.
Given the rapidly evolving situation, we cannot accurately forecast the impact of cobot 19 on the business today.
Any economic slowdown will negatively impact our company. This is our biggest risk, which we are monitoring closely and will provide an update during our first quarter earnings call.
No.
Lets review the year and whats ahead.
2019 was a pivotal year for inner workings, we laid the foundation for platform to drive improved returns for our shareholders. We took action to significantly lower our cost and expect the full benefit of these actions will be realized in 2020.
We did great operational excellence and remove complexity from our business.
And we pursued great.
What used to new playbook with a firm commitment to driving profitable growth.
We were very disciplined to only accept new revenue in contracts, we're confident will yield an attractive return.
This new higher bar did not slow our new client wins.
In fact, we set a new annual record signing 159 million.
New revenue at full run rate.
I'm very proud of our sales and operations teams for staying aggressive not only forging new relationships with a fantastic client roster.
But also in their diligence creativity and tenacity to ensure we can deliver on our clients objectives, while still meeting our own return thresholds.
To give you some perspective on a few these great new wins in the last two months of 2019, we landed a print and branded merchandise solution with one of the world's largest rental companies.
In addition, we signed a new engagement to provide a packaging retail displays and shop in shops solution for a luxury watchmaker, which I previously called out as a top pursuit during our November call.
During the third quarter call. I also noted we were close on another sizable pursuit and I'm happy to announce that we just recently landed that partnership after the started the year, it's a print and point of sale solution in Europe, and Asia Pacific for one of the largest global food companies.
We're very excited about a year of landing new high quality work.
But as we look forward, we need to remain discipline and passed our historical focus on top line expansion without enough regard the bottomline success.
This discipline includes raising the bar on new Cogs contract signings and an active review of underperforming current contracts.
The goal. This review is to work with our clients to create better value for each of us.
I want to make sure. It's clear that this is a process that will be executed throughout the course of the next year and perhaps into 2021.
We have some revenue that may not be performing as well as we'd like today.
We believe we have an opportunity to optimize it in partnership with the client.
If we can't find a mutually favorable solution, we will exit those contracts. This is part of the multiyear transformation in our business, which naturally carry some revenue headwinds as we navigate trading out less profitable revenue for higher return growth.
Another major focus in 2019 was to ensure that we have the right operating platform and cost structure in North America, which is by far our largest market.
And I believe the hard work we've done over the last 15 months has put us in a strong position to achieve operating leverage in our North American business.
However, we've always been less profitable internationally, where we have less scale.
Therefore, one of our top priorities for 2020 and a key next step in our transformation is to evaluate our international operations.
Applying some of the lessons learned through our successful initiatives to improve profitability in North America. We are evaluating what changes we should make internationally to be a stronger more profitable company.
Now, let's take a few minutes to more clearly distinguish the puts and takes in our gross revenue for the current year.
2020 are playing as for approximately $100 million of additional new revenue from the ramp up of recently signed contracts.
Our team is proud of that number and if the high quality work it represents.
But we also expect a revenue reduction from less profitable work being exited.
In addition, we're seeing some pull back and spend internationally, particularly with consumer goods companies.
This is beyond the normal secular headwinds, we would expect in certain areas of our business like print.
Taken together these three factors new revenue exited contracts and revenue headwind stemming from lower international spend result in about a 2% net increase in gross revenue for 2020.
Excluding any impact from covert 19.
This growth rate also excludes $15 million of incremental revenue in 2019 on bill in hold arrangements, which Don will discuss in a moment.
Looking beyond 2020, I'm confident in our ability to continue winning substantial highly profitable new business.
And we expect the current revenue headwinds to subside.
This will enable us to improve our revenue growth rates based on our significant addressable market, our competitive position and how we're seeing our solution resonate in the marketplace.
I'd like this year 1.0 point with you related to our revenue profile.
We recently achieved alignment with our entire team of business development executives on a new standardize Commission plan.
We previously had complex highly customized plans that did not always align the interests of our salespeople with the interest of the company to the degree we would have liked.
Moving everyone to a simplified standardize well aligned plan is a delicate process, but our main goal was to retain the very talented men and women on or sales team and keep them highly motivated while protecting the best interest to the company.
Because converting all of our revenue to the new plan would have resulted in a significant and immediate drop in compensation for this hard working team.
There will be a two year transition during which they will receive retention payments based on the commissions. They would have earned under the old plan.
You'll see these retention bonuses as a restructuring charge in our results until late 2021.
Overall, the realignment of our sales Commission plans is expected to result in a net annual reduction of approximately $5 million of commission expense on the same base of revenue over the long term.
And since we believed that the structure of the commission plan in conjunction with our deal approval process is no better aligned to achieve profitable growth.
This change should further contribute to the signing of additional profitable new business.
I'll now turn it over to Don.
Thanks Rich.
Thanks, rich below a buddy.
Fourth quarter gross revenue was $319 million, an increase of 9% over the fourth quarter of 2018.
Full year 2019, gross revenue was $1.158 billion.
An increase of 3% over 2018.
Excluding currency impact our gross revenue increased 5% in 2019.
Before reviewing our gross profit I'd like to take a moment to explain a couple of items occurring in the fourth quarter at impact revenue gross profit and adjusted EBITDA.
As a result of the material weaknesses previously disclosed in sufficient evidence exists it's to support the recognition of revenue and arrangements containing bill and hold provisions.
Which we had been differing until the product shipment from our warehouse.
Due to the remediation of those material weaknesses, resulting from improvements in our control environment. We're now able to support earlier revenue recognition for bill and holes arrangements.
This change has no impact on our expected revenue for 2020 and beyond but it resulted in $15 million incremental revenue.
$3 million of incremental gross profit.
$2.8 million of incremental adjusted EBITDA in the fourth quarter of 2019.
Second item relates to our acquisition of Madden Communications last year.
Which brought with it highly developed logistics capability that has allowed us to make warehousing for core service offerings.
Accordingly costs relating to warehousing and certain other service is dedicated to specific clients are now classified as cost of goods sold.
Whereas in the past these were recorded its SGN a.
The fourth quarter of 2019, we reclassified $13.8 million of these costs of which $9.44 million was recorded in S. Gionee and the first three quarters.
Similar cost in prior years were not material.
This change in classification has no implications the pricing and our client contracts many of which reflect a margin based on product costs.
Our gross profit was $262 million the full year 2019, which has a gross margin of 22.6%.
Our plan reflects 800 basis point improvement in gross margin for 2020.
As we onboard higher quality revenue and she has lower quality revenue as rich talked about.
Net loss for the fourth quarter of 2019 $6.5 million or 12 cents per diluted share.
Net loss for the full year, 2019 was $10 million or 19 cents per share.
The main difference between our net loss in adjusted earnings related to restructuring charges from our cost reduction plans.
Adjusted net income for the full year 2019 was $7.3 million or 14 cents per diluted share.
This is below our prior expectations, primarily due to an unfavorable tax result in the fourth quarter.
We had income tax expense of $4 million on a pre tax loss of $2.6 million in the fourth quarter.
Ordinarily you might assume that we would have a tax benefit instead of an expense.
However, we had a $1.7 million nonrecurring tax expense related to the write off of previously recognized state income tax benefit.
And we're not able to take advantage of foreign tax credits, because we do not have sufficient positive taxable income in the United States.
When you translate this tax treatment to the impact on our adjusted net income it becomes even less meaningful due to the significant restructuring charges and other onetime items driving the that loss.
At the current level of taxable income it is very challenging to forecast the tax expense on our adjusted pre tax income.
Quite frankly, we don't think this metric is informative to our shareholders until we're generating positive taxable income and no longer have this disadvantaged tax treatment.
Therefore, we have decided not to provide guidance for adjusted diluted earnings per share in 2020.
Adjusted EBITDA was $15.5 million in the fourth quarter and $49 million for the year.
This compares to $27.3 million for the full year 2018.
I want to pause here to note substantial progress we have made in improving our systems and controls.
We have successfully remediated, our prior period material weaknesses and there were no new ones identified in 2019.
This improvement in our control environment has given us enhanced financial reporting.
Which resulted in an immaterial revision to prior period results as reflected in our 10-K filed this week.
Also as I mentioned, a moment ago enhancements made to our systems and controls allows us to recognize revenue on billing hold arrangements when our performance obligations are complete.
Turning to the cash flow statement of the balance sheet.
Cash flow provided for my operating activities was $22.5 million in 2018.
At December 31st our net debt position was $116 million.
Our total debt to trailing 12 months EBITDA ratio at the end of 2019 was 3.2 times.
We currently have adequate liquidity with $42 million available to draw on our credit facility.
Now turning to the outlook for 2020.
As rich mentioned earlier, there is a tremendous amount of uncertainty around the impact of coal that 19 on the economy and therefore on our business.
It's too soon to quantify this impact.
We will give you an update during our first quarter earnings call.
All of the guidance, we're giving today excludes impact resulting from coal bid 19.
Our 2020 plan reflects gross revenue to be in the range of $1.15 billion to $1.175 billion.
Rich provided color on the moving parts of our revenue and now I'd like to break down the moving parts in our profitability.
Our plan reflects 2020 adjusted EBITDA.
To be in the range of $54 million to $58 million or at least 15% improvement excluding the onetime benefit in 2019 from revenue recognition on bill in holding arrangements discussed earlier.
2020, adjusted EBITDA will benefit from the net impact of more favorable growth in our revenue.
While new contracts in the early bunch of ramping it up have not yet reach their full profit potential adjusted EBITDA from this new growth more than offsets the loss of EBITDA from revenue that is shrinking or being exited.
Additional positive drivers of our EBITDA include the savings from lower commissions expenses that rich discussed and the remaining benefits from our prior cost reduction plans.
We are fully implemented our north American account staffing model to reduce costs and driving efficiencies in the way we operate.
We expect to realize the remaining $11 million savings from these actions this year.
These positive drivers of our EBITDA.
Revenue growth cost reductions and lower commissions expense are partially offset by the necessary investments to upgrade will replace outdated inefficient systems, namely in our warehouse and finance platforms as well as investments in employee Merit increases.
The net impact of all of these factors as an increase of approximately $10 million, an adjusted EBITDA for 2020.
As a result of the progress to date from our multiyear transformation plan.
Investments made and initiatives underway, we're better positioned to withstand changes in economic conditions going forward.
And now it would be glad to answer your questions.
Thank you and ladies and gentlemen, if you have a question just press Star then one on your telephone keypad to withdraw your question just press the pound key.
And our first question is from George Sutton with Craig Hallum. Please go ahead.
Thanks, I wondered if you could address a general perspective for how the business works and different economic environments. So if if a history as a guide is correct.
Your ability to deliver net cost savings in a challenging market environment challenging economic environment has yielded you better new business opportunities than normal.
The same time your existing business can sometimes be challenged and my sense is with your take or pay contracts, you've been able to kind of bend the curve a little bit.
On that side of it can you address both those sides.
Sure. Thanks George.
So there's no question that we are sensitive to changes in marketing spend and in an economic slowdown marketing is always impacted to some degree with spend reductions.
That said the proposition that we provide clients more efficiency better visibility to their marketing supply chain is exceedingly attractive in a pressured economic environment. So coming out of the last recession, we had a record new business year, you know and I think.
Got it sets us up well for an environment, where a client is looking to reaccelerate their business after a slow down.
Now on your existing business that historically has had some effect, but again I believe you change the dynamics of your contracts a bit to make it more predictable for you is that correct.
Yes on the existing business a couple of things we've done right. So we very much push to enterprise level contracts, which have a minimum spend commitment in an extended.
Timeframe of that have that contract.
Duration, which gives us more visibility and then I would say you know we've been Ics really focused on the deal review team, making sure we fully pressure test the economics, and all the ins and outs and the cost to serve of the new business. One boarding we have a high degree of confidence that good profitable business and if there.
Was some reduction in spend it's less sensitive to that that reduction spend from a profitability standpoint than maybe some of the existing prior business was.
Gotcha now you mentioned that you were planning to optimize your revenues are up from optimize your margins with some of your existing customers, which obviously could deflate. Some of your revenue growth going forward can you give us a sense of.
Have a eggs or any examples.
The customer names, but just examples of where you've been able to take a customer with a certain contract type and turn it into a more attractive type that I've kind of curious are you targeting an ROI are you targeting a timeframe.
That kind of improvement and I'd be it for me. Thanks.
Yes, Thanks, George So we're really looking holistically at.
Again, the the mix of business the profitability of that mix the cost to serve the technology requirements. So it's an all in full review that I think we have a much better view of not just what's the revenue, but what does what does it take to serve that revenue and we are setting a a target.
Yes hold of profitability by account, we have regular account reviews and we're looking at any business that is not performing to our expectations again is as you know when we signed a new contract. We've built out a set of assumptions that we've that we've built that contract again, sometimes the mix of work change the volumes.
Changes so we're reviewing that on a regular basis and we're working with our clients to make sure we optimize it in some cases, we're suggesting to them that theres. Some additional work that we'd like to do for them that would help us optimize the profitability and we've had a couple of successes in that regard. So that's one specific example.
Great. Thanks, guys.
Thank you.
Thank you so much in our next question comes from Chris Mcginnis with Sidoti and company. Please go ahead.
Afternoon. Thank you for taking my questions.
I think just to kind of follow up on I'd, just tell me the accident years.
<unk> going forward for sure.
In the impacts of the top line can you can you maybe quantify how much that possibly could be a drag as you look out throughout the year.
Yes.
I can't really you know what we're looking at the ins and outs of existing.
Revenue that we're we're exiting as well as some of the international headwind. So those are really the two key factors, but I would say that the.
It's it's maybe.
A third of the a third of the headwinds we're seeing.
Okay. Thank you and then can I guess just.
Looking out to be environment, obviously, it's a little bit challenge at the moment, but.
Maybe just talk about how new contracts was shaping up maybe before the before you started shooting impact maybe from kroner. Thank you.
Yes, I'd say two things on the the pipeline continues to be strong there're a number of active conversations.
But I will say.
Those conversations aren't as of <unk> no. None of the pipeline has all say dried up but clients are very distracted understandably, so with the current situation and environment and so I think I wouldn't be surprised if we see a bit of a slow down in some of the conversion that we.
Expected to see of the pipeline, but the pipeline is very robust consistent with what we saw last year.
Great. Thanks for taking my questions and good luck in Q2.
Thank you.
Our next question is from Kevin Stein K with Barrington Research.
Hey, good afternoon. So.
So as you say you talked about wanting to evaluate your international operations. This year, maybe just talk about how.
You balance the need to serve your large global clients with.
The need or maybe the lack of.
Need to have a presence international operations.
Thanks for the question, Kevin I think that's that's exactly the center of this this evaluation right. The clearly serving our clients expectations in the geographies, we need to serve them is the highest priority and we don't intend to.
Put.
That at risk at the same time, we think we've look we've learned an awful lot with the project we've done in North America, the optimize cost to serve we you know we think you're you're now seeing the flow through of that cost reduction over time I know in the past we've got a lot of questions. How are you going to do that and not compromise your service to your clients business I.
We have proven to ourselves that we can do that we know where the leavers are and so we're going to apply that to thinking about a.
A much more complex environment, which exists across V.A.T. multiple geographies multiple regulatory environments and figure out how can we be as simple and cost efficient as we can internationally, but with a focus on ensuring that we deliver for our clients.
Okay got it.
Can you.
The extent that you can maybe just a <unk>.
Expand a little bit more on the <unk>, The New Commission plan and.
How you see that Incenting.
The proper behaviors in terms of driving profitable revenue growth going forward, you know maybe comparing to how.
The the commission plans operated previously.
Yes, so look I think that one of the biggest issues with the prior plan was that it was.
So inconsistent and so.
We benchmark versus the external market place, we did bring in a consultant to work with us on that we've worked with the sales team to make sure. There's alignment there and we've made sure that that plan is consistent across.
All of the sales reps and that we're all chasing exactly the same.
The same outcomes, both the company and our sales force. So I think for the biggest move forward was that was we've moved from a highly.
Inconsistent plan to a highly consistent plan with consistent expectations and reward mechanisms that against every single part of our.
Outstanding Global Salesforce.
Okay, Great and you mentioned you.
The new staffing model.
Can you just maybe give us a some sensor a color of that type of efficiencies you're seeing there. So far you know maybe cost savings it.
The account level or however, you could characterize it relative to.
Your previous method of operating.
Hey, Kevin's done thanks for the question. So so again, the the cost opportunity on.
This was $15 million.
Which we started.
Beginning of last year and implemented in the fourth quarter or so so we realized 4 million in its entirety in 2019 and the budget majority of the remainder to come through this year. So.
The savings are coming from more standardized consistent ways of working across all the account teams.
In addition to staffing new business on a more.
Systematic basis will score a client or customer.
Due to a size and its complexity. So it's a it's it's a much more rigorous approach to understanding and reengineering the processes in the way things work and then the way new business is brought on.
Okay got it and then.
Bill and hold revenues that.
Fourth quarter, I guess, we should kind of think of that is a catch up and.
You know maybe you'll continue to have those but it just won't be is lumpy going forward.
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Yeah. This is revenue that would have been.
Recognized.
When we would ship and that is because where it because we improved our control environment. We now have the opportunity to have visibility into that.
And recognize that revenue now.
And similarly in 2000.
It 20 and beyond.
We've had that same type of revenue so whatever would have been theoretically at the end of 2020 pushed out it would would be recognized.
With with the new capabilities with Bill on hold.
All right and how should we think about the warehousing offering in terms of yes, it's just something that's.
Kind of rolled in with everything else you're.
Providing on an enterprise contract.
You know so it's just kind of baked into the profitability is.
So how you price of contractors, we should we think there's more of a.
Separate offering with a different margin profile I mean any color you can provide there would be helpful.
So I think you should it almost always I think in no way with no exceptions is a integrated part of the offering largely in primarily the beer wine and spirits vertical given the complexity of the three tier distribution system and the importance of warehouse.
Management as the goods branded goods are just go out to the <unk> the distributor before going to either to the on premise of the off premise.
So that's that's the core of of the offering what I think is notable is that we believe that that capability is significantly improved and will be a continued driver of us to be able to drive incremental profitability as we serve that revenue ourselves rather than serving.
<unk> through a third party provider.
Okay, Great and then lastly.
Given the.
Classification of some of the expenses for best you need to cost of gold goods sold how should we think about gross margins going forward.
So.
I think the most important thing is too yeah. We would we gave the dollar amount of the Reclass you can see what the gross margin looks like in 2019 with the Onboarding of the new profitable business and the continued evaluation of less profitable business, we're expecting an expansion in gross margin in 2020.
By about 100 basis points.
Okay. That's very helpful. Thanks for taking the questions.
Thank you Kevin.
Thank you.
And we conclude our Q NHS sounds like today, I would like to turn to called back to rich tonic for his final thoughts.
I'd just like to say thanks, everyone for your time and interest in inner workings.
We will remain focused on driving our transformation forward in 2020, and I believe we have a strong strategic plan to continue to enhance our platform for higher quality more profitable growth in the future. We look forward to updating you as the year progresses have a nice evening.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
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