Staffing 360 Solutions, Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Sep 2016

[Operator:]

Greetings ladies and gentlemen, and welcome to the Staffing 360 Solutions’ Fiscal Year 2016 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. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. 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 who has joined us today for Staffing 360’s fiscal year 2016 earnings conference call. I am joined here today by Brendan Flood, Staffing 360’s Executive Chairman; Matt Briand, President and CEO; and David Faiman, our Chief Financial Officer. 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 our website, www.staffing360solutions.com. Before we get started, I’ll take a brief moment to read the Safe Harbor statement for today’s conference call. This conference call will contain forward-looking statements within the meaning of the U.S. federal securities laws concerning Staffing 360 Solutions Inc. Forward-looking statements are subject to a number of significant 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, September, 7, 2016, and Staffing 360 Solutions expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call. During these prepared comments, we may make reference to certain non-GAAP measures such as adjusted EBITDA. Where applicable, we have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measure. Now with that, I’d like to turn the call over to Staffing 360’s Executive Chairman, Brendan Flood. Brendan?

[Brendan Flood:]

Thank you, Darren, and good morning everybody. As per usual, I will make a few opening high level remarks. I will then hand the call over to Matt Briand for some extra color on the performance of our operations, to David Faiman to add some detail on the financial statements before Darren Minton adds a few brief comments on our uplisting to NASDAQ and the liquidity of our stock. At that point, I’ll provide an update on certain initiatives before opening the call to a Q&A session. During this call, you will hear that in the course of our 2016 fiscal year, we delivered the largest recorded revenue figure in our corporate history of $165.5 million. We delivered a record level of adjusted EBITDA of $4.1 million, and for the first time we delivered a full fiscal year in which we were operating cash flow positive with $2.1 million. You will hear how our operational performance has continued to make huge strides and how our business margins have continued to improve. Despite making six acquisitions in a little over two and a half years, we have kept our eyes keenly on our strategic targets of $300 million in annualized revenues, a strong M&A program with intelligent integration, and a firm handle on the financial drivers within each of our businesses. We continue to be very pleased with where we are in our development plans and we commend each and every one of our employees for the positive improvement that they deliver on a daily basis. At this point, I will hand the call over to Matt Briand, our President and CEO for an update on our operational performance. Matt?

[Matt Briand:]

Thank you, Brendan, and good morning everyone. Before Dave dives into the financials, I will provide some of the highlights of our operations as we continue to grow organically and implement our acquisition strategy. First and foremost, in fiscal 2016 we completed two more acquisitions while also achieving strong organic growth of 8.3% for the fourth quarter and 7.1% for the full fiscal year. The first acquisition in fiscal 2016 was Lighthouse Placement Services, which became part of our portfolio in July of 2015. Lighthouse enhances our engineering staffing offering in eastern Massachusetts and New Hampshire. Although we have only had Lighthouse under our belt for the past year, they bring $15 million in annualized high margin revenue to the portfolio and another growth story to the mix. Speaking of growth, we are also pleased to have the JM Group join the Staffing 360 family. The acquisition occurred in November 2015 just before the start of the fiscal third quarter. The JM Group has been one of the U.K.’s leading recruitment firms for over three decades with over $25 million in revenue. You may recall that due to the JM Group’s close proximity to the existing Longbridge office, we talked about some potential synergies last quarter. To that point, Longbridge and the JM Group have officially combined corporate offices in London. We are keeping the brands distinct as per our intelligent integration approach; however, with all of the U.K. staff under one roof, the amount of energy and excitement from the sales and recruitment teams is fantastic, and this allows us to save approximately $300,000 per year in rent between the two businesses. Across all of our operations, we are pleased with what we have accomplished this past fiscal year and in the fourth quarter. We experienced over 7% organic growth from the company’s existing staffing division in the U.K. and the U.S. We achieved our largest quarterly revenue and gross profit figures in the history of Staffing 360 Solutions, and all of our employees have done a fantastic job growing the business. We now have over 4,000 temporary associates across all subsidiaries at any given time. On the M&A front, we have a pipeline of potential acquisitions that could take us past our publicly stated goal of $300 million in revenues. As we continue to grow organically and through our M&A program, we believe Staffing 360 is looking forward to a very bright future. I will hand the call over to David Faiman, our Chief Financial Officer for the financials. Dave?

[David Faiman:]

Thank you, Matt, and good morning everyone. It’s a pleasure to speak with you today. Beginning with the fourth quarter of fiscal 2016, we reported revenues of $44.4 million, which represents growth of $12.2 million or 37.8% over the fourth quarter in the prior year. As Matt mentioned earlier, of the 37.8% growth, 8.3% is organic and 29.8% is from the acquisition of Lighthouse Placement Services and the JM Group. This quarterly revenue puts us on an annualized revenue run rate of over $175 million. Our gross profit expanded even further, resulting in $7.7 million for the fourth quarter or 38.9% growth over the prior year. This growth expansion resulted in 17.3% gross margin for the quarter for a 20 basis point increase over the prior year. Our operating expenses grew $1.4 million on an absolute dollar basis, resulting primarily from the acquisitions made during the year; however, cost management outcomes of our pathway to profitability initiatives and the strong revenue growth resulted in a significant decrease in operating expenses as a percentage of revenue from 25.2% in the prior year to 21.4% in the current year, or a 380 basis point decline. The performance is even better on a run rate basis with operating expenses of $6.6 million in the current year or 14.9% of revenue as compared with 15.9% in the prior year’s fourth quarter, a 100 basis point decline. All of the above contributed to an overall decline in net loss of $1.2 million or 30.1% as we continue to move closer to positive net income. Finally, for the fourth quarter adjusted EBITDA, a measure we monitor quite closely, grew 164.8% from $404,000 in the prior year to $1.07 million in the current year. Turning now to the full fiscal year 2016 performance, our revenue of $165.6 million was a 28.5% increase over the prior year, of which 7.1% was organic and 21.8% was from acquisitions. Similarly to the fourth quarter, gross profit also grew at a faster rate than revenues, resulting in $29 million for the year or growth of 28.8%. Gross margin remained unchanged at 17.5%. Our operating expenses grew on an absolute basis by $3.6 million mainly due to the acquisitions, but continued to decline as a percent of revenue from 23.3% to 20.3%, or a 300 basis point decline, illustrating the benefits of our strategy and the operating leverage potential. On a run rate basis, operating expenses were 15.1% of revenue for the current year, a decline from 16.9% in the prior year. All of the above contributed to a significant decline in net loss from $18.1 million in the prior year to $9.7 million in the current fiscal year, or a 46.2% decrease. Finally, as I mentioned earlier, fiscal 2016 was a major milestone in the company’s history with the achievement of $4.1 million in adjusted EBITDA or over 400% growth over the prior year’s performance of $752,000. Just a moment ago, I referred to a key performance indicator that we monitor and include in our Form 10-K, that being operating leverage. We’ve spoken several times about how the staffing industry and our strategy provide an opportunity to generate significant growth and profitability through minimal operating overhead. In order to measure the efficiency by which revenues and gross profit contribute to adjusted EBITDA, we compare the growth in adjusted EBITDA to the growth in gross profit. For fiscal 2016, that measure, our operating leverage was 51.7% as compared with only 23.2% in fiscal 2015. Switching now to the balance sheet, total assets of $55.1 million is a 30% growth over the prior year of $42.3 million. That growth is coming from both the two acquisitions we completed during fiscal 2016 and the organic growth I discussed earlier. Key items to point out are the significant growth in cash and cash equivalents at year-end of almost $2 million versus only $19,000 at the end of May 2015. Our DSO improved by six days, translating into a significant contribution in operating cash flow which I’ll discuss in a minute. Growth in accounts payable and accrued expenses is primarily due to timing of payroll and the growth in the overall business. Finally our leverage ratio, defined as the gross value of debt less cash and cash equivalents divided by adjusted EBITDA, declined from 26.5 times to 6.3 times, driven mainly by our significant growth in adjusted EBITDA despite the overall increase in net debt. If we were to exclude our asset-backed loan revolving credit facilities, as these are merely advances on our accounts receivable, the leverage ratio is even more compelling at 2.8 times, a decline from 9.2 times in the prior year. Finally, turning to cash flow, cash flow provided by operating activities was $2.1 million, which is a complete reversal from the use of cash in the prior year of $3.1 million. This was driven primarily by our growth in adjusted EBITDA and improved DSO I mentioned earlier. It’s also important to note that included in our operating cash flow are cash payments not only with interest but also several non-recurring transactions, such as legal fees, capital raisings, and other transactions. Cash interest paid was $2.2 million for the year and other cash paid for non-recurring items amounted to approximately $1.5 million. We want to highlight these data points because as these cash payments begin to decline, as they should, our cash flow from operating activities will increase accordingly. Cash flows from investing activities increased $3.2 million primarily from the acquisition of Lighthouse and the JM Group. We also posted a surety bond of $1.4 million associated with a new CSI case, and finally we purchased the remaining 51% interest in PeopleSERVE PRS for $101,000. Cash flows provided by financing activities increased $1.3 million on a net basis. We continued to pay down debt but also raised $2.8 million under our S-3 shelf registration through the end of fiscal year May 2016. To recap our achievements, we have recorded the largest revenue figure in our corporate history at $165 million. The fourth quarter revenue puts us on an annualized run rate of over $175 million. We have recorded positive adjusted EBITDA seven quarters in a row. We have delivered $2.1 million positive cash flow from operations, and our strategy is unfolding as evidenced by the growth in revenues, gross profit, adjusted EBITDA, operating cash flows, and operating leverage. At this point, I will hand the call back to Darren, who will provide some remarks before we lead up the Q&A. Darren?

[Darren Minton:]

Thank you, Dave. As discussed, there have been many milestones this past fiscal year, but our NASDAQ listing, subsequent S-3 registration statement and volume improvements certainly deserve particular mention. Our average trading was only 1,000 or 5,000 shares on a good day when we first uplisted to NASDAQ. This is in large part due to the limited number of shares in the market at that time. Specifically, out of 5 million shares outstanding, only 300,000 shares were in our free float. This all began to change when our foreign S-3 registration statement was declared effective on March 22, 2016. First, the S-3 allowed us to tap the public markets for additional capital. Second and just importantly, the S-3 registered over 4 million previously issued but unregistered shares, allowing shareholders to more easily put these shares into brokerage accounts and helping set the stage for improved volume. Our free float has now improved from that 300,000 share figure to over 4 million shares. This has driven our volume from a paltry 1,000 shares of trading when we uplisted to over 350,000 shares, according to Bloomberg’s three-month average, over a 300 times increase. In fact, we had several days topping 3 million or 4 million shares traded. Needless to say, this is a major improvement for Staffing 360 Solutions. There’s still more work to be done, especially when it comes to our market cap; however, as a NASDAQ-listed company, our ability to raise awareness and to broaden our audience is increasing, as exemplified by our volume. For instance, on August 15 we opened the market by ringing the NASDAQ opening bell. This was broadcast on various financial networks such as CNBC, Bloomberg and Fox Business News, and was a great way to thank and acknowledge our hard-working employees while simultaneously introducing the company to a larger audience. Also of importance, we received our first set of analyst reports since becoming a NASDAQ-listed company over the past eight months. We now have two analysts covering the company and we’re pursuing additional research opportunities as we continue to expand our reach in the capital markets. As far as our capital markets progress, this includes over $5.3 million in equity over the past several months that we’ve raised through our S-3 registration statement, broadening our shareholder base and institutional ownership. We now have over 1,700 shareholders. We’re building our awareness through various investor conferences and road shows, including enhanced initiatives through video, email, social media, and one-on-one meetings throughout the rest of the year. This includes the Rodman and Renshaw conference in New York, which we’ll be announcing via press release later this week, as well as Sidoti and LD Micro conferences, just to name a few later in the year. As we continue to grow both organically and through acquisitions, it’s a matter of time before we reach our goal of $300 million of revenue and our story becomes even stronger. With that, I’ll hand the call back to Brendan for some closing remarks. Brendan?

[Brendan Flood:]

Thank you again, Darren. As mentioned on our last call, there are a number of key initiatives for the group during the current calendar year. Most importantly, there is the organic growth of our existing business and the conversion of this growth into additional EBITDA and positive cash flow. This is a major reason that we are here and we will continue to drive these metrics. Underpinning this, however, is the need to strengthen our balance sheet and to deliver on the strong M&A program that we are following. The executive management team is acutely aware of the importance of these two items to our loyal shareholder base. We anticipate being able to bring additional news in this regard over the coming months, and we believe strongly that the strategy of the company is being and will be implemented. In conclusion, we’ve had a very strong year and we are on an upward trend. Our business plan continues to work and we believe that our activities will continue to deliver over the coming quarters. Operator, at this point I would like to hand the call over to a Q&A session.

[Operator:]

[Operator instructions] Thank you. Our first question is from the line of William Gregozeski with Greenridge Capital. Please proceed with your question.

[William Gregozeski:]

Hi guys. I was wondering if you could--I know you can’t talk specifically about anything you’re looking at, but generally speaking, where are you guys with M&A targets? It seems to me like getting more companies in the door and getting that immediacy of the cash flow is most important for the balance sheet and [indiscernible] going forward.

[Brendan Flood:]

Thanks Bill. This is Brendan. Maybe I’ll start, and Matt or Dave, if you want to join in, feel free. So Bill, as we look at the market for opportunities, mostly we are seeing that opportunities are coming to us rather than we’re having to go and look for them. The quality of businesses that we’re looking at is very high. We’re in a number of conversations. The pipeline of opportunities we have is very extensive. Every single day that goes by, we’re in conversation with somebody. Some of those conversations are at a more advanced stage than others, but as you rightly intimated, we can’t really tell you exactly what they’re going to look like until we’ve completed them. But I can tell you that we have some great quality targets in our sights and we’re having some very constructive conversations with them.

[William Gregozeski:]

Okay, and with the money you’ve raised to date, do you have any money set aside for potential acquisitions, or is it really just going to pay interest and debt?

[Brendan Flood:]

It’s principally going to pay interest and debt and just continue to strengthen our balance sheet. It’s no secret that Dave and I particularly spend the vast majority of our time looking at ways in which we can strengthen our balance sheet even further and make sure that we have sufficient funds to manage our M&A program, so a little bit like not being able to tell you exactly about the M&A programs, we can’t tell you exactly who we’re in conversations with and how advanced those conversations are, but I can tell you that we’re in conversations.

[William Gregozeski:]

Okay, all right. Thank you.

[Operator:]

Our next question comes from the line of Ajay Tandon with SeeThruEquity. Please proceed with your question.

[Ajay Tandon:]

Hey, thanks for taking my question, and congratulations on the results, guys.

[Brendan Flood:]

Thank you.

[Ajay Tandon:]

So just a quick question, kind of a follow up to the last question on--you know, obviously we’ve been keenly following your acquisition strategy, and obviously congratulations on all the acquisitions over the last couple years. Can you talk a little bit about just two things, really - number one, kind of need for capital, which you started to touch on--you know, which works hand-in-hand with your M&A strategy; and then number two, maybe if you could just touch on a little bit organic execution, organic growth, once again working hand-in-hand with your buy-and-build strategy.

[Brendan Flood:]

Okay, thanks Ajay. Maybe I’ll take the first one - this is Brendan, and Matt, if you want to take the second one?

[Matt Briand:]

Sure.

[Brendan Flood:]

So obviously we need capital in order to make and fund our acquisitions, so nobody’s going to give away their company for free. We again--I’ll probably reiterate the answer to the previous question that we are in a number of conversations with potential providers of that capital, but until we’re at a point where it’s actually done, we can’t make any announcements, but we are in conversations. Matt?

[Matt Briand:]

From an organic growth perspective, so a little bit about what we spoke of from our intelligent integration piece. So first and foremost, when we integrate a new organization into the Staffing 360 family, the first thing is we look at minimizing any attrition, and that’s across our client base and our internal employee base. We want to the organization to run the same way tomorrow and the next day as it did yesterday prior to acquisition, and certainly the last piece is to continue to retain and build upon the strong brand and execution. There are many different synergies that we can take amongst the other subsidiaries. There is best practices that we utilize and that we implement across all the different subsidiaries as well. We look at new markets that we can penetrate based on the service levels that we’re offering, and to date if we look at 2015 organic growth within the industries in which we participate, we’ve outperformed that, and as mentioned earlier our Q4 organic growth, and if we look at that and measure it against 2016, we’ve outperformed that as well. Again, it’s opening new offices, it’s winning large span contracts at higher margins where they recognize the value that we provide as organizations, and we are starting to leverage cross-selling opportunities between subsidiaries, and the most recent win was an insurance industry contract that was initiated here in the U.S. and the relationship was brought across to the U.K., and the U.K. market has won that as well. So there’s a number of different ways to get it done, and so far we’ve been very successful in doing so.

[Ajay Tandon:]

Great, thanks guys. Appreciate it.

[Operator:]

Our next question is from the line of Ryan Lovett with Ashton Thomas Private Wealth. Please proceed with your question.

[Ryan Lovett:]

Hey, good morning gentlemen. A couple questions here. First and foremost, just out of curiosity, does the $300 million target of revenue have any significance within the company itself and/or the sector that you guys operate within?

[Brendan Flood:]

Ryan, thanks for that question. This is Brendan again. I guess the $300 million was framed about two and a half to three years ago, when our revenues were zero. To come up with a number much higher than $300 million probably would have been implausible. Now that we’re racing towards it, you will probably hear in the next couple of months that we are re-evaluating what that number is. But in terms of its significance in the market, it will most certainly bring us within the top 100 players in the United States, so that makes us significantly more noticeable but it also makes us a far more attractive proposition for other M&A targets out there who may want to join our journey.

[Ryan Lovett:]

Excellent. Then just a quick follow-up question. Obviously you guys are showing great numbers and are certainly on an upward trend here, but unfortunately there’s some kind of a disconnect between the market price of the stock and how well you guys are performing. What do you think that disconnect might be, and then what other things do you guys have on the agenda, like consolidating offices to get more profitability?

[Brendan Flood:]

Darren, you want to take that?

[Darren Minton:]

I can take the share price question. So Ryan, good morning. We believe there is a big disconnect with the share price as well - we’ve mentioned this on previous conference calls, and we believe we’re undervalued, as most public companies do. But we believe our revenue and our gross profit, our adjusted EBITDA increasing quarter over quarter, year over year, every quarter we’re making improvements on pretty much all financial metrics. We’ve been growing through expansion of offices, as Matt was mentioning as well, so we don’t believe it’s an operational issue. As we were discussing previously during the scripted portion, we have had a problem historically when we did our reverse split upon uplisting to NASDAQ, where we have very limited shares in our float. Now that’s starting to be corrected and there’s over 4 million shares in our float, the volume increase has been great, so we believe it’s simply dealing over the past six months since our S-3 went effective, there’s been a huge amount of supply of stock coming from those shares that are now registered, and you know, with the markets, it’s all about supply and demand. So as we come down to this triple, if you will, where these registered shares are now for the most part in the market, that should hopefully start to correct itself. We’ve dealt with a lot of supply of stock coming to market through these historical shares being registered, which was a necessary evil, but now that we’ve got this volume in place and most of those shares in the market, we believe eventually our fundamentals will start to take hold and the share price will start to reflect more our operational outlook and where we’re headed in the future, including our goal of $300 million in revenue. Does that answer your question, for the most part?

[Ryan Lovett:]

Absolutely.

[Matt Briand:]

If you want, I can hit on the profitability piece. So I think the best way to look at it, and Dave talked about it in the scripted portion, is what we’ve done as an organization and managing for is operating leverage. So as Dave indicated, if you looked at the operating leverage in fiscal year-end 2015, it was somewhere in the area of 23%, and coming out of 2016 it’s upwards or close to 52%, so that’s a significant swing there. Again, we’re looking at managing expenses throughout the various organizations, and that starts at the corporate level all the way down through the subsidiaries, shared services and resources, streamlining various processes, whether that’s on the sales or recruitment side, again sharing best practices, developing accountability and metrics-driven measurements throughout all the organizations, and I think last but not least is a higher in-development process is much more dynamic today than it was a year ago. So as we integrate these organizations, we’re able to share all these very best practices across and it’s resulting in the growth in the operating leverage, which at the end of the day drops more down to the bottom line.

[Ryan Lovett:]

Great, thank you, guys.

[Operator:]

Thank you. As a reminder, to ask a question today, you may press star, one from your telephone keypad. Thank you, that marks the end of our question and answer session today. Does anyone on the team have any closing remarks?

[Brendan Flood:]

Thank you, Operator. So just to summarize before the end, you’ve heard me say before that one of our internal mantras is that we do what we say we are going to do. I’m hopeful that the progress over the past 12 months and in our most recent quarter will have given you comfort that this is true. We believe that Staffing 360 represents an opportunity for tremendous growth. This is especially the case when you consider our record revenue, our record adjusted EBITDA, our improvements in our operations, our uplisting to NASDAQ, our S-3 registration, all the while completing two more acquisitions and achieving strong organic growth. We have made strong progress and have a very exciting but not without its challenges time ahead of us. As always, by delivering on our strategic aims, we remain committed to growth in revenue, to growth in earnings, and to growth in shareholder value. Operator, that is the end of our call. Thank you all again, and have a very pleasant day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.