VOLT Q3 2018 Earnings Call

Operator: Greetings and welcome to the Volt Information Sciences Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lasse Glassen, Investor Relations.

Lasse Glassen: Good afternoon, and thanks for joining us today for Volt Information Sciences' fiscal 2018 third quarter earnings conference call. On the call today are Linda Perneau, Interim Chief Executive Officer and President of Volt Workforce Solutions and Paul Tomkins, Senior Vice President and Chief Financial Officer. By now, everyone should have access to the news release which was issued after the market close today. If you have not received the release, it is available on Form 8-K with the SEC and in the Investors section of the Volt's website at www.volt.com. In addition, as part of our efforts to improve the quarterly financial disclosures, also posted in the Investors section of the website as a supplemental slide presentation accompanying today’s call. Before beginning today, 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’s recent filings with the SEC for a more detailed discussion of 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 provide useful information for investors. A reconciliation of those measures to GAAP is included in the earnings press release issued this afternoon. With that, it's now my pleasure to turn the call over to Volt's Interim Chief Executive Officer and President of Volt Workforce Solutions, Linda Perneau. Linda?

Linda Perneau: Thank you, Lasse. Good afternoon and thank you for joining us today on our fiscal 2018 third quarter earnings conference call. I'll begin today's call with a brief update on our previously announced strategic alternatives review and overview with my background and highlights of my initial observations over the last 12 weeks. Paul Tomkins, our Chief Financial Officer, will then discuss additional details about our third quarter financial results, including an update on our liquidity position. I will conclude with a detailed update on our plan to drive profitable growth. When I first spoke to you on our earnings call last quarter, I had been with Volt for approximately one-week and had been appointed Interim CEO about 24 hours earlier. During that same time period, the Company announced it was fully engaged in a process to evaluate potential strategic alternatives to maximize shareholder value. The board remains committed to this and is considering all options. My job, however, is to focus on running the business and return Volt to profitable growth. To provide some background on my experience, I am a 25-year industry veteran, having worked at several of the industry's largest global companies. Throughout my career, I have a strong track record of building high-performance teams that meet and exceed financial goals and expectations. I have successfully turned around several underperforming staffing businesses and consistently delivered on growth and results. Since being at Volt, I have been wearing many hats over the last 12 weeks. Interim CEO, President of VWS and leader of multiple field geography operations. In each of these capacities, I have spent a significant amount of time with a broad cross-section of our employees, contingent workers and clients. I want to share some highlights of my learning. Volt has a very strong foundation from which to build. We have extremely dedicated teams of colleagues with an immense sense of pride and loyalty to the organization, our clients and each other. We have an impressive client portfolio with many relationship outpacing typical industry life cycles. We are challenged with current issues troubling the industry overall, most notably talent scarcity, and we have to be creative with our recruiting solution. Overall, the market remains strong. The segments in which we operate for the most part continue an upward trajectory, and we have opportunity across the broad scope of clients with both current and projected contingent needs. Thanks for the Company's progress over the last two-plus years in fortifying the balance sheet and monetizing non-core assets. Our focus now is on full execution of returning topline growth, margin improvement and driving respectable operating incomes with a much more detailed and deliberate strategic plan to execute. We have a lot of work ahead of us and hurdles to overcome. Our SG&A costs are too high as a percentage of our revenue, and we have uncovered immediate opportunities to improve efficiencies and cut costs. We have been and continue to be swift in taking actions. As many of you are aware, the Volt Workforce Solutions, or VWS, our North American Staffing Business is the largest business segment. The bulk of my comments today will focus on VWS and the detailed plan we are aggressively executing. Overall, however, third quarter results are not yet reflective of the games we expect to ultimately achieve from our strategic priorities and efforts already underway. And in fact, we are already seeing early indications of topline growth improvement in the first month of the fourth quarter. Now I would like to turn the call over to Paul, who will review Volt's third quarter financial results.

Paul Tomkins: Thanks, Linda. Good afternoon. Today, I will provide additional details on our third quarter financial results as well as provide a status of our liquidity position. We continue to make solid progress in improving our cost structure and year-over-year revenue declines as compared to the last several quarters. Let's now turn to the third quarter results. Our revenue in the third quarter of 2018 was $257.8 million. When compared with the prior year quarter, total company reported revenues declined $32.1 million or 11.1% on a year-over-year basis. The revenue decline was driven primarily by decreases in our North American Staffing segment of $13.7 million, along with decreases in our corporate and other businesses of $19 million which were mostly driven by the sale of our game testing business at the end of fiscal 2017. Excluding the impact of non-core businesses sold or shut down during this past year, on a constant-currency basis, our year-over-year revenue decline would have been 6.6% on a same-store basis. This is an improvement from our year-over-year decline of 7.5% last quarter and 10.3% in the first quarter of 2018 on a consistent basis. Looking at the revenues in our largest segment. Revenue in our North American Staffing segment, which provides a broad spectrum of contingent staffing, direct placement, recruitment process outsourcing and our other employment services was $215.7 million in the third quarter, down 6% on an year-over-year basis. This represents improvement from the second quarter in which VWS revenue declined 6.7% on a year-over-year basis. This quarter, we had growth in our light industrial and engineering job categories, but had declines in IT and technical and our administrative and office job categories. We are beginning to see underlying improvements in field activity and performance driven by Linda's initiatives and execution of the strategic priorities, which she will touch on shortly. Overall, our total company gross margin percentage in the third quarter was 14.1%. On a same-store basis, gross margins declined approximately 150 basis points compared with the prior year. While we experienced improved margins in our MSP and international businesses during the quarter, this improvement was offset by competitive pricing pressure from a higher mix of larger customers in our VWS business and from a soft quarter in our call center business, due in part to higher training costs. We believe our increased focus on VWS on both driving retail growth and expanding our direct hire business will help to significantly improve margin going forward. We remain vigilant in our ongoing efforts to drive operating efficiencies and manage expenses. During the quarter, selling, administrative and other operating costs decreased $4.7 million or 10% versus last year. Excluding the impact of businesses sold, selling, administrative and other operating costs were down 5.4% year-over-year. Approximately $2.4 million of the SG&A improvement year-over-year is directly attributable to ongoing cost-reduction efforts in all areas of the business and from negotiating key vendor contracts under more favorable terms. As a result of the actions taken thus far, in fiscal year 2019, we will have eliminated at least $40 million or 20% of annual SG&A costs as compared with fiscal year 2015 excluding businesses sold. Turning to our total company profitability for the quarter, adjusted EBITDA was negative $5 million in the third quarter compared to a positive $1.4 million in the year-ago period. Net loss in the third quarter of 2018 was $11.4 million compared with a loss of $5.5 million in the third quarter last year. On adjusted basis, excluding special items, including $3.1 million in restructuring and severance charges, net loss was $8.8 million compared with an adjusted net loss of $5.8 million in the prior year quarter. While we're clearly not satisfied with this, we have definitive actions we are taking to better position the company for improvement in the fourth quarter of 2018 and into 2019. Now let's move on to our segment operating results. Operating income in our North American Staffing segment was $3 million in the third quarter compared with operating income of $5.7 million a year ago. On a sequential quarter basis, our operating income improved by $1.4 million as a result of both improved gross margins and continued expense reductions. While a sequential quarter improvement is headed in the right direction, there is still much work to be done to improve our operating results. Operating income in our International Staffing segment was $0.7 million, down slightly compared to a year ago. Our total company operating loss for the third quarter was $9 million compared with an operating loss of $1.5 million in the prior year period. Excluding businesses sold, gain on sale and the increase in the restructuring and severance costs, operating loss in the third quarter was $6.3 million compared with a loss of $2.2 million in the prior year period. And finally, with respect to our liquidity position, at the end of the quarter, we had a total of $52.7 million in global liquidity, up from $33.4 million in the prior year quarter. As of August 31, our global liquidity was $54.1 million compared with $38.9 million a year ago. And with that, let me turn the call back to Linda.

Linda Perneau: Thank you, Paul. Without a doubt, these results indicate there is a lot of room for improvement. I see significant opportunities to restore the luster of Volt and improve our performance at levels at which we can be proud. To that end, we are now looking at the performance of VWS business specifically in a more granular way, designed to give laser visibility into specific drop category performance. Today, we offer a broad range of services in three specific job categories, light industrial, professionals and administrative and office. Light industrial represents the largest portion of our VWS business at 57%, professionals and administrative and office collectively make up the remaining 43%. Within professionals, there are three job categories, IT, engineering and technical. Within administrative and office, there are also three, admin, call center and accounting. When we look at the performance of these, Q3 2018 versus Q3 2017, we see a much clear picture. Light industrial, our largest job category showed positive year-over-year revenue growth. In the professional’s arena, engineering also showed positive year-over-year revenue growth. Each of these job categories have different sales approaches, often different client contacts as well as different candidate profiles. Looking at the business this way allows us to understand our strengths and continue to dedicate efforts and resources in these areas to fuel continued growth. We're also better able to further analyze underperforming job categories and address the underlying issues. Now with this granular detail around specific job category performance, we can confidently execute four strategic priorities, all of which are already in progress. Our four strategic priorities are: number one, organization design; two, business optimization; three, delivery excellence; and four, growth and expansion. Let me provide insight into each of these in more detail, beginning with organization design. Soon after I joined the Company, we announced changes to VWS' organizational structures that are designed to strengthen the business with focus on sales and service delivery. This shift is designed to align both structures with how clients buy, while also ensuring we have the appropriate delivery team dedicated to specific client type. Furthermore, Volt gains a competitive advantage through specialization, focus and accountability. As part of this realignment, VWS is now comprised of three units. The specialty solutions group, the strategic solutions group and the global solutions group. Our specialty solutions group represents our nationwide branch network as well as our vendor-on-premise network. The focus of the branch teams will be sales and delivery to retail clients. In other words In other words, growing, expanding and maintaining new and existing business as well as providing qualified field employees to meet client needs in the light industrial, professionals and administrative and office job categories. As I noted on our last call, we view retail clients as an extremely important way to rapidly drive topline growth. We have strong influence and partnerships with our retail customers, and this is an area where we can generate a quick sales impact given the much shorter sales cycle compared to our larger customers. Also, the retail business allow for higher price points and flexibility of candidate wages. Direct hire placement, a key element in our effort to grow gross margins is a significant offering attracted to retail clients. We are leveraging the previous expansion of the dedicated sales force, which started earlier in the year, and activity focusing on new business generation in all markets across the U.S. To ensure we deliver qualified candidates to our clients quickly and effectively, we have dedicated recruiters aligned with the sales force responsible for maintaining a database of ready-to-deploy candidates and order fulfillment execution. While there is upside opportunity across all of our job categories, the most significant revenue and gross margin growth potential lies within professionals, specifically IT, engineering and technical. For the past several years, we have utilized a remote recruiting strategy, centralizing all delivery in multiple recruiting centers. The remote recruiting strategy can be effective for larger enterprise clients that do not allow access to client end users. It typically is less effective with retail business, putting Volt at a competitive disadvantage. Shifting to a local regional sales and delivery approach will allow us to capture retail market share in the professionals job category, historically yielding the highest gross margin price points. We will also continue to utilize our centralized recruiting model, slightly redesigned to more effectively support certain enterprise who will benefit from this approach. The vendor-on-premise teams will continue to be dedicated teams, physically setting up the client locations, performing all recruiting, sourcing, candidate matching and employee relations activities required. These are predominantly delivery functions focused on ensuring full execution and client satisfaction. These programs allow us to become an extension of the clients' own management or HR team. We are able to maintain client-specific candidate databases enhance the client experience and candidate experience and immediately respond to ebbs and flows in our clients' business. Next, our VWS strategic solutions group is designed to provide us with competitive advantage in mid-market sales, specifically sales efforts focused on the vendor-on-premise relationships I referenced earlier. This has been and continues to be a growing category within the staffing industry, and one that represents a significant strategic opportunity for Volt. Enhanced and expanded focus on sales opportunities in this category will allow us to capitalize on both local and regional delivery strength. I believe the best way for me to bring the importance of these relationships to life is to share with you what I learned from my client visits last week, both of which were vendor-on-premise programs. In both meetings, the client vocalized how vital Volt was to their own business. They genuinely believe that Volt's success is their success, and throughout both organizations trusted partnerships had been developed between both program representatives and the client team. The two organizations are intertwined, a necessity for any successful program. We had candid conversations about our performance, where we excel, where we could improve, and together we built solutions for continuous improvement. These client relationships are vital to any organization, expanding our footprint with additional vendor-on-premise program creates the sticky factor necessary for sustainable growth. And finally, our global solutions group, formally Volt Consulting Group or VCG, will continue its focus on the Company's managed service provider, or MSP, business and VMS delivery. But it has now expanded its scope to include the European Consulting Group to better deliver global solutions to clients, maintain a competitive advantage and align to how clients buy MSP services. This alignment will also enable us to provide our clients with best practices from both teams, leverage synergies and maintain a strong position in this space as a global provider. As part of our organization design, I also want to talk about my new team of experienced and highly successful industry-leading executives, implementing our strategy and managing VWS' day-to-day operations. These are individuals who not only have the strategic fortitude necessary for a company our size, but each are strong operators with years of demonstrated sales and delivery success. I have personally worked with each of these individuals. I trust them. I have seen them consistently deliver results, and I am confident in their ability to do the same here at Volt. Our team now comprises a strong blend of new addition with some of Volt's most talented, capable and tenured leaders. Together, our entire senior team, myself included, has over 150 years of relevant experience. We cannot, however, do this alone. We need to have talented colleagues at all levels of the organization. The good news is, we do have many engaged colleagues throughout our field organization and our corporate teams embracing our vision. Over the course of the last 12 weeks, we have certainly seen a positive shift in employee morale. I routinely hear from our employees about their renewed enthusiasm. As is the case with any change, not everyone is aligned. We have had to make some tough, yet necessary decisions, resulting in some personnel changes. We have continued to move some individuals into different roles to better leverage their strengths, we have promoted many others who have raised their hand to do more, and where we have gaps, we are actively filling them. As we move forward within this new organizational structure at VWS, we plan to leverage new ideas and perspectives, while preserving the integrity, values and pride that are evident across the enterprise. Our next strategic priority, business optimization, includes efforts underway to enhance operational execution. We are doing this in two ways. First, improving efficiency in both the front and back office, and second, driving productivity improvements across the organization. We expect these efforts to yield meaningful cost savings, a portion of which can then be reinvested into important recruiting and candidate acquisition resources. Our single best opportunity to achieve rapid business optimization is fully leveraging our new enterprise-wide applicant tracking system. As you may recall, last year, we went live with the system and the teams have been working to complete all phases of integration. Today, we are swiftly mobilizing efforts to fully integrate it all intended tools, reporting and processes to achieve the original objective of increasing field productivity and upgrading business processes. Full optimization of the tool will enhance the candidate experience, simplify candidate acquisitions, efforts and automate outdated manual processes. We are targeting the end of calendar year 2018 for completion. In addition to this, we also see significant benefits to be achieved from process reengineering and standardization across the enterprise, and we'll provide more details on our progress here in the coming quarters. Delivery excellence is our third strategic priority. This is a lofty goal, and it will continue to evolve based on the needs of our clients and as we continue to improve in attracting candidates in the market. This structure shift, I discussed earlier, will allow us to have a more focused delivery model and be more agile to various client needs. Fully leveraging our system-wide applicant tracking system will minimize steps to onboard candidates. For example, integration of available recruiting tools will increase our speed to match, especially critical in today's market. And mobilizing data analytics to drive strategy around job posting and ROI will allow us to yield highest rate of success. Today, however, given the immediate order fulfillment needs and requirements of our clients, our efforts are simultaneously very tactical. I mentioned earlier, talent scarcity is one of the greatest challenges faced in the industry today. We are attacking this challenge in many ways. First, we are adding recruiters in markets with upside opportunity based on order volume. We are engaging offshore recruiting efforts for specific ramps. We are extending office hours of various branches, giving us greater accessibility to working and non-working candidates. We are tracking all anticipated ramps between now and the end of the year to ensure we have the appropriate resources assigned and the right delivery model engaged. We are meeting with our enterprise clients and getting ahead of upcoming business needs and changes in business strategy. And last, but not least, we are tracking and measuring key delivery vitals by individuals to ensure we are achieving required productivity levels necessary to maintain order fulfillment expectations. Our last strategic priority is growth and expansion. This priority covers our efforts in two areas, top line revenue growth and further growth and expansion of existing client relationship. I spoke earlier about the refocus of our sales force on new retail business generation with higher-margin price point. While our efforts here are just beginning, we are already seeing a positive impact. Total activity of the sales team has increased 40% over the last seven weeks with our sales teams presenting booked capabilities to nearly 1,000 prospects per week via phone and to over 100 end users in person on a weekly basis. Over the same time period, we have tracked new business revenue and gross margins and have seen notable growth week over week. Our average gross margin on this new business is approximately 200 basis points higher than our consolidated gross margin in Q3. Our attention on direct hire placements has resulted in a 10% increase in per day billings. Over a full quarter, as these results continue to grow as well, the effect on margin is impactful. Our strategic solutions group is also hard at work, identifying opportunities to drive top line growth with additional vendor-on-premise clients. After only four weeks of the creation of this team, they are actively engaged with seven opportunities. Driving growth and expansion with existing clients will occur in multiple ways. First, we have aligned our most senior client relationship leaders to our portfolio of marketing clients to ensure Volt is meeting contractual obligations, filling every order across the country and identifying opportunities to expand our relationship. Second, we have established key client relationship expectations for our field organizations, and we'll be utilizing these to maximize our touch points with existing clients in our branch network. Third, MSP clients in our global solutions group also offer significant opportunity for top line growth as VWS gains traction as a top provider in these preferred MSP program. Finally, we will leverage our newly-created specialty solutions group, the strategic solutions group and the global solutions group to proactively provide additional service offerings to clients and work closely to move clients to the maturation life cycle, beginning with branch delivery, all the way to MSP engagement. As we move ahead with our plan, I am beginning to see a shift in the mindset of the great team we have in place that is best summarized with the tagline embrace, elevate, execute. Our team knows that we have to embrace a new way of thinking about our business. We have to elevate our performance with respect to both our near-term and longer-term initiatives. And finally, we need to flawlessly execute. We are keenly focused on execution. At the end of day, what matters most is our ability to flawlessly execute at every level of the organization, from the front office filling every order and delivering superior value to our clients to the back office ensuring every client invoice is accurate and every level in between. I am convinced that Volt has untapped potential, and I'm excited to be leading the team and organization into the next phase of growth. I'd like to take a minute to personally thank all of our employees for their dedication and commitment to our company. The resilience you have all demonstrated is admirable. The passion you possess for Volt is contagious and the unmitigated willingness to embrace change is inspiring. I am confident that based on the team we have in place and the initiatives and efforts underway, we can be successful. As we do this, I look forward to driving significantly enhanced value for all of our stakeholders in the quarters and years ahead. This concludes our remarks. Thank you for your time and attention today.

Operator: Similar to recent prior quarters, management will not be conducting a question-and-answer session today. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.