Staffing 360 Solutions, Inc.
Q4 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Greetings, ladies and gentlemen and welcome to the Staffing 360 Solutions Fiscal Year 2015 Earnings Conference Call. At this time all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce Darren Minton, Executive Vice President of Staffing 360 Solutions. Mr. Minton you may begin.

[Darren Minton:]

Thank you, operator. And thank you to everyone today who has joined us for Staffing 360’s earnings conference call. I'm joined here today by Brendan Flood, Staffing 360's Executive Chairman; Matt Briand, our President and CEO; as well as Jeff Mitchell, our Chief Financial Officer. The purpose of this call today is to discuss the financials for the fiscal year ended May 31, 2015. As well as provide an update regarding Staffing 360's high growth initiatives as part of our selective M&A strategy. At the conclusion of this call we will be answering questions during a brief Q&A session. Also I want to bring to your attention that a webcast and replay of this conference call is available by following the link contained on the bottom of the press release announcing this call and it’s also available on Staffing 360's Web site www.staffing360solutions.com. Now before we get started, I’ll take a brief moment to read the Safe Harbor statement regarding today’s conference call. This conference call will contain forward-looking statements within the meaning of the U.S. Federal Security laws concerning Staffing 360 Solutions Inc. Forward-looking statements are subject to a significant number risks and uncertainties, and actual results may differ materially. Please refer to the Company’s filings with the SEC which contain and identify important risks and other factors that may cause Staffing 360’s actual results to differ from those contained in our forward-looking statements. All forward-looking statements are made as of today, August 5, 2015, and Staffing 360 expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call. Now with that, I’d like to start the call with a few words from Staffing 360’s Executive Chairman, Brendan Flood. Brendan?

[Brendan Flood:]

Thank you, Darren, and welcome everybody. As usual, I will make a few opening remarks before handing over to Jeff for some comments on the numbers and to Matt for a color on our operations. I’ll then add some further comments and open the call to a Q&A session. The end of the financial offers a great opportunity to reflect and to determine if we are going in the right direction. We believe strongly that we are. Over the course of the past 12 months we are grown our revenues to over $128 million in fiscal 2015. And now we are on a run rate in excess of $145 million following the addition of our recent acquisition of Lighthouse Placement Services. We have delivered an adjusted EBITDA profit for three quarters in a row when our plan at the beginning of the year was to get there by fiscal Q4. Our Pathway to Profitability exercise has been pivotal in delivering these numbers. Continuing to strengthen our balance sheet and with the introduction of a $25 million revolver from MidCap Financial, we believe that we are well placed to continue to deliver on our promises and to support our acquisition strategy. During the course of the past year our results to deliver on our strategy of building an international staffing firm with revenues in excess of $300 million has been strengthened. And we now find ourselves at the halfway point on this deliverable with ever increasing levels of visibility as to how we're going to get there. Hopefully during this call we will share with you some very positive development and offer confidence that we will deliver on our strategy. At this point I'll hand over to Jeff for some more details on our excellent results. Jeff?

[Jeff Mitchell:]

Good morning, everyone. We’re pleased to be sharing this report in early August rather than September which is when this call would normally happen if we'd filed our 10-K according to the standard SEC filing schedule. In addition to growing our revenue and our geographic footprint over the past year, the Company's continued to focus its tremendous amount of effort and resources to improving and becoming more efficient in our core processes and financial reporting which is evidenced in the Company's growth and ability to complete a rigorous autocross of spanning three countries and still produce audited consolidated financial statements and a Form 10-K filing a month ahead of schedule. We hope that you are -- you find us to be a pleasant surprise to receive this filing early. The early filing also has some strategic purposes for the company that will be explained a little later in the presentation. Similar to our last earnings call rather than simply regurgitating the numbers from the financial statements our collective objective today is to help you understand the financial performance and direction of the company. As typical I'll start out with the balance sheet. Some of our efforts may not jump on at you at first glance. So I'll try to highlight a few things that we've been working on. The total assets remain nearly constant at 42.3 million versus 42.0 million in the prior. This flat line doesn’t really tell the true story. A more in depth review reveals that accounts receivable increased by approximately 2.4 million which is offset by a decrease in the intangible assets. The increase in the accounts receivable is simply the result of increased revenue. Our DSO continues to hover between 49 and 52 days. Likewise the total liabilities remain constant at 32.8 million versus 32.4 million. Again the primary driver here is revenue growth which resulted in the company drawing on its AR financing line in the amount of 13 million rather than 10.8 million in the prior year. This increase was materially offset by the conversion of bonds and seller notes to common stock that has been discussed on our prior calls. Taking a look at the balance sheet on a more micro or analytical perspective will reveal the following. Accounts receivable increased from 16.4 million to 18.8 million and as I stated before the DSO continues to hover at a respectable 49 and 52 days. The debt outside of the accounts receivable financing has not only decreased by approximately $4 million but the structure of that debt has improved tremendously. Some of the balance sheet key ratios for example, which show working cap has improved by approximately $600,000. Our current ratio has improved by 5%, improvement in both of these ratios while undertaking an aggressive M&A program has truly progressed as customarily one would expect to see slippage in the short-term when acquiring companies. Now moving to the income statement, there are a few highlights that I'd like to bring your attention. There is really missing the obvious 213% increase in revenue. For companies undertaking a buy and build strategy in the staffing industry, revenue growth is a critical metric. The entire profitability model in the staffing sector is one of leveraging the economies of scale. As a company implementing the buy and build strategy we're pleased to report a revenue trend line showing revenue near zero for 2013 growing to 41 million in 2014 and now posting 129 million in 2015. However as Brendan said, we're not done yet, subsequent to our fiscal year-end, we purchased Lighthouse on July 8th, adding another 15 million to this baseline. This coupled with our above industry average organic revenue growth has us on target to achieve revenue well north of $150 million for 2016. And that's prior to adding any additional acquisitions. We are well on our way in fact over halfway to achieving our stated goal of 300 million in revenue. I would be remised if I didn't touch briefly on our growth profit line. As you can see the company reported 22.5 million in gross profit dollars up from 7.8 million in the prior year. This of course is a function of revenue growth, the company's gross margin percentage have settled from 18.9% in 2014 to 17.5%, what is very important to understand is that our business units have experienced little to no slippage in their individual gross margin percentages. The company drives more and more through a pure staffing model and as we purchase other companies, this will impact our reported gross margin percentage either up or down from time to time. I think that it is important that you understand the company's growth is not only being fueled by this buy and build program but also the company is keenly aware and focused on driving an organic growth effort. Once again in the fourth quarter, the company turned in double-digit organic growth rates, resulting in an annual organic growth rate being 18.9% as shown in footnote number 14 of our financial statements that is certainly outpacing the industry average of 9%. We're only interested in buying, successful and profitable businesses with strong management teams, then it is up to us to help them continue to grow and support their sales initiatives. Our approach clearly seems to be working as each of our larger subsidiaries have posted double-digit growth in their first year post acquisition, unlike many others in the industry our strategy can be boiled down to belief on integration-lite approach. Of which most of you have heard about many times by this -- on our previous calls and it really is a key differentiator for us. Operating expenses may not be the most exciting thing to talk about on a call like this. However, anyone that understands the staffing industry certainly knows that this is one of the more critical components of building a successful, profitable and scalable staffing business. The simple point I want to make here, is the fiscal year 2015 operating expenses as a percent of revenue have decreased from 42.9% to 23.3%, which is pretty remarkable given the fact that the revenue has grown from 41 million to 129. This ladies and gentlemen is the keystone to building and growing a profitable staffing business, economies of scale. Moving on to our adjusted EBITDA, if you haven’t already done so, I would encourage you to read a review on Monday's press release in which the company provided a clear reconciliation from net loss to adjusted EBITDA. In the press release, we provided the non-GAAP calculation of adjusted EBITDA. The company has now at the critical inflection point where it starts to generate positive cash flows and is capable of generating real and meaningful earnings. We've achieved positive adjusted EBITDA the last three consecutive quarters that Brendan mentioned earlier, reporting $400,000 in adjusted EBITDA in Q4 alone. More importantly this puts us in a positive adjusted EBITDA territory for the entire year with approximately 750,000 across fiscal 2015. Of course we get on these calls to spend 30 minutes together with one another each quarter and we're thankful that you take the time to join with us. We on the other hand have the privilege of working hundreds of hours with RBSM our independent public auditors, as they analyze, scrutinize and evaluate curry little amount and disclosure of our financials and filings. They do a fabulous job at their job. We are proud to now be able to say that our unqualified audit opinion no longer contains a going concern paragraph. What does this mean to you, simply put the term going concern names the assessment as to whether a company has adequate access to capital to continue operations for at least 12 months past the balance sheet date. To be deemed a going concern a company must be able to self fund its operations and make scheduled debt payments. Through a strong collective effort from our entire team and our company’s performance, our independent auditors have now listed the going concern qualification on their audit opinion and Staffing 360 have a standard unqualified opinion associated with the audited financials. Now back to exactly where I started this conversation about the strategic purposes for filing the Form 10-K early in this year. First we are thrilled to inform the world that we no longer have a going concern audit opinion. Second, we want our current investors and shareholders to see the improvements in our operating performance and the results of our audit. Third, we are currently working with perspective lenders and sellers that are anxiously awaiting the results of this filing so the sooner we can deliver this to them to better the chances of achieving a successful transaction. And four, as we proceed along the process of uplisting to NASDAQ, this certainly cannot hurt as NASDAQ sees this growing top-line revenue by 213% and having the going certain audit opinion lifted. In conclusion we hope this provides you with the desired insight into our vision, efforts and progress. We look forward to fiscal 2016. With that said I'm going to pass the baton over to Matt our CEO and President for a few words.

[Matt Briand:]

Thank you, Jeff, and good morning, everyone. Now that the financials have been discussed, I will be focusing on some of the highlights of the year and recent developments as we continue to implement our acquisition strategy and grow organically. Speaking of which Monroe Staffing, our largest brands have seen significant organic growth. Monroe started out building corporate offices in Connecticut earlier this year. So in May we announced the move of our entire subsidiary headquarters to a brand new office with over 10,000 square feet of space and room for 55 employees. In fact even though it's larger we estimate this newer and more flexible office space will save us money on a monthly basis. Monroe now has over 15 offices across the East Coast and five on-site locations generating double-digit revenue growth this past year. Longbridge, our UK-based operation, has benefitted from the newly combined offices in London after our Poolia acquisition. The group is now showing increasing revenue and operating profit. In fact the Longbridge team pulled out ahead of budget and is on-track for additional growth as the team continues to expand. On the same vein PeopleSERVE, our IT services subsidiary in the Boston market continues on its expansion as well. PeopleSERVE has added 14 new clients and is also grown its revenue by double-digit rates since being acquired in May of 2014. In fact as Jeff mentioned our operations posted organic growth of 18.9% over the past fiscal year on a consolidated basis, which is a tremendous achievement. On the M&A front we were pleased to announce this past month that we completed our latest acquisitions of Lighthouse Placement Services. Lighthouse was founded in 2001 and specializes in engineering workforce solutions and complements our existing mix of staffing industry verticals. However more importantly, the acquisition has provided us with a highly motivated engineering team and two extremely talented staffing industry entrepreneurs and Alison and David Fogel. Lighthouse generated approximately 15 million in revenue over the past year and their engineering expertise service clients ranging from local firms to large defense contractors. Needless to say, we are pleased to have them join the Staffing 360 journey. With Lighthouse added to the mix we are now at $145 million run rate. You may recall during our last earnings call we said we had four acquisitions under letter of intent that would add a further 180 million of annualized revenues. Now that Lighthouse has been acquired this leaves us three of those acquisitions under LOI that can add a further 165 million in revenue. Of course, there can be no certainty that any of these acquisitions will take place until they are finalized but we have a robust pipeline of acquisitions right behind them representing 500 million in revenue. Needless to say, as we move into the next reporting period we believe Staffing 360 is looking forward to a very bright future. At this point I'd like to hand the call back to Brendan who will provide some final remarks before we start the Q&A. Brendan?

[Brendan Flood:]

Thank you, Matt. As you have heard, there is a long list of milestones that have been reached in fiscal 2015 with positive results achieved. They can be summarized again as follows; strong revenue growth, strong gross profit growth, continuing strengthening of our balance sheet with conversions of debt to equity, continuing administrative efficiency as measured by our ability to file our 10-K one month earlier than required by the SEC. But most importantly an integrated management team across all of our business units that is united in driving our operational performance. As we begin to look forward, our main aims for the current fiscal year includes the following, continued strong organic growth rates driving our revenues, continued M&A activity underpinned by capital raising initiatives, continued strengthening of our operational performance and all of these allied to an uplisting to a major national exchange for our stock. In conclusion, our business plan is working and we believe that our Pathway to Profitability will continue to deliver the results we all desire. Jay, I would now like to open the call to a Q&A please.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Dan Trang from Stonegate Capital Partners.

[Dan Trang:]

Can you guys talk about acquisitions that you guys after they are required experiencing double-digit growth kind of wondering where some of the drivers behind that double-digit growth, obviously they were doing well before they were acquired kind of that's one of the criteria of being acquired so what are the drivers behind that?

[Brendan Flood:]

Jeff, you want to start with that and maybe Matt and I will pitch in.

[Jeff Mitchell:]

Sure. I'll be happy too. We appreciate that question, it's actually really a key component of what we think is going to be our continued success. So, our objective is to first of all, be very selective in the companies that we're looking at acquiring and as we go through that process we are looking for super strong management teams, especially people that have been entrepreneurs and our great sales people. And as I mentioned in my remarks, we talked about this integration-lite process. The portion of it that we do integrate is our real objective is to free threes entrepreneurs and great sales people, free them from some of their administrative burdens that they have had to take on as their companies have grown and been successful. And to pass the treasury functions and insurance and making payroll and those type of things, to an administrative staff and let them going out and continue to do what originally made their company so successful and so our initiative is to close on those acquisitions, free them up and let them have time to actually go out and spend more time and get deeper penetration into the existing customers, as well as spend more face to face time with new customers and being able to close additional accounts. And what we've seen over the course of the last two or three acquisitions and we hope to continue to see with Lighthouse is that these key people that have been the drivers behind the company's success up until the time we purchased them they are now able to dedicate more time to business development and client relations and using their salesmanship skills to drive that revenue and that's what I have seen from my perspective has been driving the above industry average revenue growth, anybody else want to chime in?

[Matt Briand:]

Thanks, Jeff, I'll just quickly chime in as well and it also gives the leaders of these acquisitions that we have brought on an opportunity to collaborate together so there is showing of ideas, showing of successes and energies that are brought in through all the different executive managements teams throughout the year, throughout the different subsidiaries as well.

[Dan Trang:]

And next question, and kind of wondering, how are you guys making sure when you're going about acquiring various companies that you are not overpaying for things?

[Brendan Flood:]

Well, if we actually answer that question, I'm sure there is a whole lot of people out there wishing to sell their companies would get the jump on what the negotiation tricks probably is, there are probably well understood, multiples out there, and the multiples change from time to time depending on where we're in the economic cycle, but because of the requirement these days for at least public companies to declare exactly what they've paid for their acquisitions. We can see and we can talk about brokerage as to what the market that's currently demanding and the only way you'll ever truly know that you haven't build a pay is that the post acquisition period is a glowing success and if we go back to a point that both Matt and Jeff made, or two points, one is that we're incredibly disciplined about what we will buy, so therefore we'll only buy good companies that have a greater likelihood of being successful afterwards and to Matt's point we will only but companies that have management teams that our existing management teams will want to collaborate with which allows us to have a greater success post acquisition. So you never know at the time whether you are overpaying or underpaying, you only know in the future when you look back.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Bill Sutherland from Emerging Growth Equities.

[Bill Sutherland:]

Maybe you could remind us at a high level about the revenue mix by sector and curious what it would if you were successful in getting to freeze under LOI on-board?

[Brendan Flood:]

I will do that it is Brendan. So right now $145 million is roughly split 50-50 between lite industrial and professional staffing, and on the professional staffing side it is about two-thirds IT with the remainder being principally engineering or accounting finance or administration, if we were to acquire the three other businesses and move ourselves to roughly 310 million to 320 million, it would still be about 50-50 between lite industrial and professional staffing.

[Bill Sutherland:]

And increasingly U.S. centric or split there as well?

[Brendan Flood:]

I would speak for it as well one of those three acquisitions that were asked a lot of intent is in the UK and it is doing about $40 million of revenue. Our existing UK business is doing about 10. So up to 310, 320 about 50 would be in the UK and the remainder is in the U.S. I think we have stated quite a number of times that our principal targets will always be U.S. and UK centric because of the flexibility of the labor markets, the flexibility of the labor laws, and the desire of candidates to work far more on a flexible basis than they probably have in any of our lifetimes.

[Bill Sutherland:]

I guess Jeff for you I was looking at the quarterly progression this fiscal year. I'm noticing that you ended kind of at the revenue level not too far different than where it started. Can you help us with seasonality if that is at work?

[Brendan Flood:]

Sure, yes.

[Jeff Mitchell:]

Yes, especially as you look at the lite industrial business, there is certainly some seasonality associated with that and what you would typically see in lite industrial would be on a calendar basis you see the first quarter being exceptionally slow especially given the fact that we do have some geographic concentration on the Northeast Coast due to weather and so that would be certainly the lowest quarter and it is typically somewhere between a 10% and 15% drop off from the calendar quarter, fourth quarter and then I would build pretty increasing, pretty steeply in the second quarter and the third quarter is always very robust and the first part of the fourth quarter is pretty real robust given the fact that people are driving into the holiday season and you have a lot of people in the warehouses and gift basket companies and shipping and that kinds of stuff and you would see less seasonality in the professional side but it would still follow with lower troughs and lower escalations in the professional staffing.

[Bill Sutherland:]

So the calendars Q2 and Q3 are pretty close in the past of the year or not or was Q3 better or?

[Jeff Mitchell:]

Second quarter -- second half of Q2 and then certainly Q3 is the most robust and then the first half of Q4.

[Bill Sutherland:]

Okay.

[Jeff Mitchell:]

Because end of Q4 we end up having a lot of holidays with ThanksGiving and Christmas.

[Bill Sutherland:]

And last one from me I was -- I know you are keeping the company guidance to have a target format. Is there anything we -- how should we think about as you work further to improve EBITDA margin kind of the trajectory of that potentially? I know there is a lot of moving pieces but...?

[Jeff Mitchell:]

Brendan do you want me to take that one?

[Brendan Flood:]

Sure, please thanks, Jeff.

[Jeff Mitchell:]

Sure, so at the revenue run rate there we're at right now one, of this some industry averages, so I'm not giving any particular guidance for ourselves. We would expect a public company to be doing somewhere in the range of 2% to 3% of revenue in EBITDA or adjusted EBITDA depending on what the amortization and financing cost or acquisition cost might have been and then as you grow to about $300 million company in revenue, you would expect that to go somewhere between 5% and 6.5% revenue for EBITDA. And I mean, I think it would be fair to say that we're targeting numbers very similar to that.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Michael Taylor, a Private Investor.

[Unidentified Analyst:]

You mentioned that raising capital is closely tied to your acquisition strategy, what's the latest timing regarding your capital raise and when do you expect the next basket of acquisitions to close?

[Brendan Flood:]

Okay, so you are absolutely right, Michael that they are integrally linked. We are currently working on about three-four different paths on our capital raising split between debt and equity. As would all of these things until the check is in your bank account the deal doesn't close and therefore it's not announceable so I can’t really tell you exactly what the timing is rather than to tell you that we don't have acquisitions under LOI. We aren’t working on -- working diligently on matters to fund them and as a result people related businesses, sellers are not going to stay around forever, so we will be moving to close all of them as quickly as we can raise the funding for them. And probably 90% of my job and 50% to 60% of Jeff's job when he is not closing 10-K’s a month early and 70 plus percent of Darren's job is making presentations of the financing needs.

[Unidentified Analyst:]

Thank you.

[Brendan Flood:]

So, if we could close them today, we would close them today.

[Operator:]

If there are no further questions, does anybody on the team have any closing comments?

[Brendan Flood:]

Okay. Thank you, operator. So, just to summarize before the end, we believe that we have delivered on great progress over the past 12 months and delivered on everything that we said, we'd deliver on. Hopefully you've heard this and hopefully that we have given you comfort that our activity and our momentum is in a positive direction and that we continue to represent an opportunity for tremendous growth. As always, as we deliver on our strategic aims, we remain committed to growth in revenue, to growth in profit, and to growth in shareholder value. Operator that is the end of our call. Thank you all again and have a very pleasant day.