VOLT Q1 2018 Earnings Call

Executives: Lasse Glassen - IR Michael Dean - President and CEO Paul Tomkins - SVP and CFO

Operator: Greetings and welcome to the Volt Information Sciences, Inc First Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lasse Glassen with Investor Relations. Please go ahead.

Lasse Glassen: Good afternoon and thank you for joining us today for Volt Information Sciences’ fiscal 2018 first quarter earnings conference call. On the call today is Michael Dean, President and Chief Executive Officer and Paul Tomkins, Senior Vice President and Chief Financial Officer. Before beginning today’s call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to Volt Information Sciences’ recent filings with the SEC for a more detailed discussion on the risks that could impact the company’s future operating results and financial condition. Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. A reconciliation of those measures to GAAP is included in the earnings press release issued this afternoon, March 07, 2018. With that, it’s now my pleasure to turn the call over to Volt’s President and CEO, Michael Dean. Michael?

Michael Dean: Thank you, Lasse. Good afternoon and thank you for joining us today for our fiscal 2018 first quarter earnings conference call. I’ll begin today's call with an overview of our results from this past quarter along with an update on our ongoing business turnaround efforts. Paul Tomkins, our Chief Financial Officer will then discuss additional details about our first quarter financial results, including an update on our balance sheet and liquidity position. Looking at the first quarter performance, our net revenue of $253.3 million decreased 10.6% on a same store basis versus a year ago, excluding businesses we exited or divested over the prior 12 months and excluding fluctuations in foreign currency exchange rates. Similar to the prior quarter, a significant portion of the year-over-year decline was related to lower revenues from a single large customer in our North American Staffing segment. Although we continue to maintain a strong relationship with this customer, changes to their overall human resources strategy has significantly reduced their reliance on temporary staffing resources. Excluding this customer from our current and prior periods, revenue declines over the past several quarters have been smaller and relatively steady. Despite the revenue decline, our ongoing efforts to achieve operational efficiencies and manage expenses has continued to deliver lower selling, administrative and other operating costs during the first quarter of 2018. And at the bottom line, first quarter net loss was 10.7 million with first quarter adjusted EBITDA of negative 9.1 million. It's important to remember that the first quarter is traditionally both least profitable quarter of the year primarily related to seasonal factors associated with fewer work days that result in lower revenue to cover fixed costs as well as a higher percentage of payroll taxes incurred in January as we begin the calendar new year. Since Paul will discuss our first quarter financial performance in more detail in his remarks, my comments today will focus on an update on our ongoing strategy to improve both operational and financial performance as we look ahead to fiscal 2018 and beyond. Since I provided a full update on our turnaround plan on our 2017 fourth quarter call just seven weeks ago, I will focus on the meaningful progress we've made since we last spoke. As a quick reminder, the Volt turnaround has been focused on three key pillars. First, strengthening our balance sheet and company foundations; second, streamlining our business and improving our cost structure and margins; and third, achieving top line growth. Starting with our first pillar and balance sheet enhancements, during the quarter, we entered into an accounts receivable securitization program with DZ Bank and exited our previous financing relationship with PNC Bank. The two year agreement with DZ Bank has a lower capacity of 115 million compared to our previous capacity of 160 million, but importantly the new facility actually provides more available liquidity based on less restrictive covenants and fewer restrictions on use of proceeds. Furthermore, due to improved pricing, we expect to save approximately 1.5 million over the term of the new program, which we will reinvest in our growth and turnaround initiatives. Paul will discuss this in more detail on his remarks, but we're pleased with this new program that solidifies our balance sheet and at the same time, provides stability and flexibility to execute our turnaround plan. Turning now to our second pillar objective of improving our cost structure and operational efficiencies, we continue to make progress in right sizing our administrative support function. During the first quarter, selling, administrative and other operating cost improved by 4% compared with the first quarter last year. On an adjusted basis, excluding businesses sold or exited over the last year as well as onetime expenses related to legal or other matters, selling, administrative and other operating costs were lower by about 1%. It's worth noting that these savings are net of cost headwinds including our investments in talent and technology and additional depreciation and amortization costs associated with the company wide information technology systems that were deployed last year. Moreover, we continue to execute on our cost reduction strategy. We are actively working on cost savings associated with efficiencies gained from our technology upgrade as well as other cost reduction initiatives underway, which Paul will discuss further. Over the past two years, our success in executing these first two pillars of our turnaround plan has helped us address many challenges facing the business. With this foundation in place, we continue to be laser focused on the third pillar of our turnaround strategy, which is to drive profitable revenue growth. To this end, I'm pleased with the progress we've achieved in stabilizing our smaller businesses, namely international staffing, Volt customer care solutions and VCG, our MSP business. All of these businesses have been generating momentum over the past several quarters. International staffing has experienced strong growth in Belgium and in Singapore. VCG is now ramping up several new contracts and Volt Customer Care solution expects to increase headcount in our call centers as a result of strong operational execution. The remaining segment -- and by far Volt’s largest is North American Staffing of VWS. A key to getting this business back on a growth trajectory is the appointment of a permanent replacement to lead the business. After an exhaustive nationwide executive search, I’m pleased to confirm that we have hired staffing industry veteran, Linda Perneau, to serve as President of VWS, effective May 26, 2018. Currently and until she's permitted to assume her new role in May, Linda is serving as an Executive Advisor to our international staffing business and is making important contributions to that segment. Suffice it to say, we're thrilled to have an executive of Linda's caliber and vast experience join our organization. Since 2011, Linda has held a number of senior level positions in the general staffing division at Randstad US, most recently as its Co-President. She had previously served in senior roles of increasing responsibility of that division, including Chief Operating Officer, Division President and Executive Vice President. Linda’s prior experience in the staffing industry also includes having served as Executive Vice President at Spherion, Senior Vice President of the Southeast Division at Adecco and Area Manager-West Region for Kelly Services. During the first quarter, VWS also continued to make progress on near term revenue improvement efforts. First, we maintained efforts focused on expanding and training our sales force, which as we've noted previously is key to our growth strategy. During the quarter, we continued our strategic shift toward solutions based selling by training 50 senior new leaders in our businesses as well as an additional 150 employees for an aggregate of 2300 hours on our new front end applicant tracking system. And in terms of new customer wins, during the first quarter, we continue to bring in a number of new clients with expected annual revenue in the million. In addition, since our last earnings call, we continued to invest and expand our internal recruiting team in an effort to better capitalize on existing opportunities with current clients. Before turning the call over to Paul, I’d like to reiterate that our efforts over the last two plus years have successfully addressed much of the company's foundational challenges. As a result, Volt has a solid balance sheet with significantly leaner cost structure and a sharp focus on our core staffing business where we are best positioned to maximize value. The entire team remains completely dedicated to the final phase of our strategy, which is achieving top line growth and I'm confident that we’ll do just that. I'd like to take this opportunity to thank our entire dedicated, hard working team for their continued efforts to return Volt to profitable growth. That concludes my remarks. I’d like to now turn the call over to Paul Tomkins, our CFO for a more detailed discussion on our first quarter financial results. Paul?

Paul Tomkins: Thank you, Michael. Good afternoon. Today, I will provide additional details on our first quarter financial results and discuss some key aspects of our new financing agreement as well as provide a status of our balance sheet and liquidity position. Our revenue in the first quarter was 253.3 million. It's important to remember that our first quarter is traditionally Volt’s softest performing quarter due to the combination of fewer work days as well as a higher percentage of payroll taxes incurred in January as we began the new calendar year. In the first quarter of fiscal 2018, there were 59 work days compared to 64 work days in the fourth quarter of fiscal 2017. In addition, North American staffing payroll taxes were 11.5% of direct labor in the first quarter of fiscal 2018 compared to 10.2% of direct labor in the prior quarter. When compared to the first quarter of 2017, total company revenues declined 59.7 million or 19.1% on a year-over-year basis. The revenue decline was driven by decreases from the sale of Maintech and the quality assurance businesses as well as decreases in our North American Staffing segment of 25.7 million. Excluding the impact of an the non-core businesses sold or shut down during this past year as well as normalizing for the impact of foreign exchange, the year-over-year revenue decline would have been 10.6% on a same store basis. It is abundantly clear that getting our North American staffing segment back on track is key to our turnaround effort and we remain firmly dedicated to our efforts to improve our top line. As Michael noted, we are making progress on expanding our sales and recruiting talent in order to improve VWS’ revenue performance, but there is still more work to be done. Turning now to our revenues by segment, I would first like to point out that as a result of the sale of our quality assurance business, which was within the technology outsourcing services and solutions segment, we will no longer be reporting this segment going forward. The remaining call center business, which was included in that segment Volt Customer Care Solutions is now reported as part of our corporate and other category. To provide period over period comparability in our results of operations, we have reclassified the prior period segment data to conform to the current presentation. Please refer to our earnings press release issued this afternoon for more details. Revenue in our North American Staffing segment, which provides a broad spectrum of contingent staffing, direct placement, recruitment, process outsourcing and other employment services was 206.2 million in the first quarter, down 11.1% on a year-over-year basis. Revenue in this segment was impacted by decreased customer demand in both our professional and commercial job families as well as by a large customer that changed its human capital strategy and significantly decreased overall spend on temporary staffing in the latter part of 2017. While this customer is now small on a relative basis and does not represent further downside risk, we expect similar challenging year-over-year comparisons for that customer to continue over the next two quarters. Revenue in our international staffing segment, which includes the company's contingent staffing, direct placement and managed program businesses in Europe and Asia was 29.6 million in the first quarter, down 2.5% from a year ago. On a constant currency basis, this segment was down 3.2 million, primarily as a result of the economic slowdown in the United Kingdom. This decrease was partially offset by strong growth in Belgium and Singapore, which increased 36% and 57% respectively on a year-over-year basis. And finally, looking at our corporate and other businesses, which are primarily comprised of VCG, our North American managed services programs business and Volt Customer Care Solutions, our call center business, revenues were 18.7 million in the first quarter of fiscal 2018, down 33.3 million versus last year. The year-over-year revenue decline was primarily driven by the impact of the sale of Maintech and our quality assurance business, which occurred in the second and fourth quarters of 2017 respectively. On a same store basis, excluding the businesses sold or exited of 32 million, our corporate and other businesses decreased 1.3 million or 6.3% year-over-year. This was due to the wind down of certain programs in our MSP business as well as normal fluctuations in call center activity. Despite temporal issues this quarter with both these businesses, we are confident they both have opportunities for growth in quarters to come. Overall, our total company gross margin percentage in the first quarter of 2018 was 14.2%. On a same store basis, we are pleased to have maintained margins flat with the prior year. While revenue generation remains a key focus, leveraging our selling, administrative and other operating costs to maintain profitability, it is also a top priority and we continued our progress in this area during the first quarter of 2018. Selling, administrative and other operating costs in the first quarter decreased 2 million or 4% versus last year. This year-over-year decrease was primarily due to ongoing cost reductions in all areas of the business as well as reductions from businesses sold over the past 12 months. The first quarter of fiscal 2018 included 2.2 million of higher legal fees and depreciation and software license expenses related to the completion of the first phase of our IT upgrade. Excluding these costs and the impact of businesses sold, selling, administrative and other operating costs were down 1% year-over-year. We expect to begin realizing the benefits of these investments that should further reduce overall costs and improve efficiencies going forward. For example, the new company wide information technology that was deployed last year is expected to improve our overall competitiveness and streamline processes. Our teams are completely focused on implementing the enhanced functionality, improved operational efficiency and other competitive benefits that the technology offers. Several examples of enhanced functionality include further automation of complex customer invoicing, improved workflow automation of electronic time card processing and further standardization of electronic payroll processing. We continued to anticipate this will generate annual cost savings of approximately 5 million to 7 million. We have a cross functional team addressing the highest priority IT projects to further realize the IT efficiencies critical to achieving the cost savings. We're also focused on working smarter and implementing process enhancements in many areas of the business. Beyond savings as a result of our IT upgrade, we believe we can tightly manage our costs to further drive reductions in operating expenses. In an effort to help drive these improvements, we have engaged a top industry consulting firm to identify additional opportunities to enhance our operating efficiencies. We have begun to realize benefits from these efforts and believe we can further improve our non-headcount related selling, administrative and other operating expenses. During the quarter, we incurred restructuring and severance costs of approximately 0.5 million as part of the cost cutting initiatives. The first quarter expense run rate includes the majority of the 2.1 million annual cost savings impact from these initiatives. Turning to the total company profitability for the quarter, net loss for the first quarter of 2018 was 10.7 million compared to a loss of 4.6 million in the first quarter last year. This also included an income tax benefit of 1.4 million, primarily due to the reversal of reserves on uncertain tax provisions that expired during the quarter. On the subject of taxes, I'd also like to quickly discuss the impact of the Tax Cuts and Jobs Act on our company. Beginning on January 1, 2018, this act lowered the US corporate income tax rate from 35% to 21%. The decrease in the corporate income tax rate does not impact our net deferred tax asset balance, which has a full valuation allowance reserve. Therefore, no expense related to this rate change was recognized in our tax provision for the period. What is impacted are the components of both our net deferred tax assets and the corresponding valuation allowance, which will both be reduced accordingly. However, due to the full valuation reserve, no P&L or balance sheet impact will result when implemented. Adjusted EBITDA, as highlighted in our earnings press release, was a negative 9.1 million in the first quarter of fiscal 2018 compared to a negative 0.5 million a year ago period. Now, let's move on to our operating results. Operating loss in our North American Staffing segment was 0.6 million in the first quarter of 2018 compared to operating income of 2.8 million a year ago. We expect this to improve over time through a combination of operating efficiencies and revenue growth initiatives, which Michael and I both referenced earlier in our remarks. Our total company operating loss for the first quarter of 2018 was 11.4 million compared to an operating loss of 2.6 million in the prior year period. Excluding businesses sold, operating loss in the prior year period would have been 6.1 million. Turning now to the balance sheet and liquidity position, as previously announced, during the quarter, we further solidified our balance sheet by refinancing our debt. On January 25, 2018, we exited our financing relationship with PNC Bank and entered into a long term $115 million accounts receivable securitization program with DZ Bank. During the refinancing process, we met with many leading banks and ultimately chose to work with DZ Bank as they offered us the most favorable terms. We are very pleased to have entered into this agreement for the following key reasons. First, we feel this capacity level is sufficient for working capital purposes to effectively manage our business and invest in the necessary tools to support our growth plan. Second, as Michael noted, although our new agreement has a lower capacity of 115 million compared to our previous agreement, the new facility actually provides more available liquidity based on less restrictive financial covenants and fewer restrictions on use of proceeds. Third, over the term of the program, we expect to save approximately 1.5 million in borrowing costs. Overall, the new financing program improves our available liquidity and will allow us to continue to advance our turnaround initiatives as well as our capital allocation plan. As of January 28, 2018, our total debt balance was 80 million, down 17.1 million from the prior year and temporarily up 30 million from the prior quarter, as we collateralized our letters of credit with PNC until the letters of credit were established at DZ Bank on January 31 under our new financing arrangement. In the beginning of February, we reduced our outstanding borrowings to 50 million. At January 28, 2018, we had a total of 78.8 million in global liquidity, up from 44 million in the prior year quarter. As of March 2, 2018, our global liquidity was 59.6 million compared to 31.1 million on March 3, 2017 consistent with seasonal trends. In terms of managing the use of our liquidity, our capital allocation priorities remain consistent. We are focused on ensuring there is adequate liquidity for working capital purposes to effectively manage our business on an ongoing basis as well as investing in the necessary tools and technologies that are required to support our growth plan and returning capital to shareholders. In closing, we know what we have to do to continue this turnaround. We need top line revenue growth in our main businesses and we need to continue improving our cost structure at all levels. We have sold the non-core businesses, cleaned up our balance sheet and liquidity and have the right people on board. Now, we have all of our energies focused on those areas and we need to execute. We remain confident we're on the right track to returning both to profitable growth. Thank you for your time and attention today. Now, I'd like to turn the call back over to Michael for some closing remarks. Michel?

Michael Dean: Thank you, Paul. When we announced the sale of VMC in late October last year and again reiterated on our fourth quarter call in mid-January, both Board of Directors and senior management team continues to review a broad range of options to drive shareholder value and advance the company's plan for growth. As a result, while we believe the stock is significantly undervalued, the company, board and management continue to be restricted from buying shares. I'm sure you can appreciate that until we have specific actions or news to report, it is not in our shareholders' best interest to discuss these potential opportunities in advance. And accordingly similar to our last earnings call, we will not take questions today after these prepared remarks, but look forward to further communication with our shareholders regarding potential opportunities in the near future. To everyone on this call, thank you for your support and for joining us today. We look forward to speaking with you again when we report our fiscal 2018 second quarter results in June. Thank you.

Q -:

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.