Staffing 360 Solutions, Inc.
Q1 2017 Earnings Call Transcript

Published: 17 May 2017

[Operator:]

Greetings ladies and gentlemen, and welcome to the Staffing 360 Solutions Fiscal First Quarter 2017 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 who has joined us today for Staffing 360’s fiscal first quarter 2017 earnings conference call. I’m joined here today by Brendan Flood, Staffing 360’s Executive Chairman; Matt Briand, President and Chief Executive Officer; 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 as well as on our website. In addition, we are doing something new this quarter, as we have released an earnings call presentation with slide you can follow as we progress to our call this morning. Both the presentation and our webcast details can be found in our earnings release in the investor relations section of our website at 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 U.S. Federal Securities’ laws concerning Staffing 360 Solutions, Inc. These 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, May 17, 2017 and Staffing 360 expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call. During the prepared comments, we may make reference to certain non-GAAP measures such as adjusted EBITDA. Where applicable, we have provided reconciliation 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 Flood:]

Thank you, Darren, and good morning everybody. As usual on this call, I will make a few opening remarks. All the remarks you will hear are intended to be supplemented by the presentation mentioned by Darren that has been made available on our website this morning. This is our first quarterly call on our new financial calendar despite of being our seasonally weakest quarter of the year, we have continued to make strides and improving our finances and also improving our operational metrics. Our revenue number showed its first year-over-year decline as the weather in New England was more severe this winter than it had been in the mild winter of 2015, 2016. In total, we had four fewer working days this year than in the comparable quarter of last year. Despite this, we improved our total gross profit, our gross margin and our adjusted EBITDA. Adjusted EBITDA improved by 57.4% year-over-year on a trailing 12 months basis and by 46% on a Q-over-Q basis as we continue to improve the efficiency of our cost base. You will hear more on this from Matt in a moment. We also continue to improve our balance sheet through the investments by Jackson Investment Group allowing us to remove some short term maturities and to continue our working capital cleanup. You will hear more on this from Dave. I mentioned on our most recent call that our M&A program has been reinvigorated. We're currently in discussions with three parties. One of those discussions is at in advanced stage. While there's no certainty that any transaction will complete, we're excited that we're back into M&A mode after an almost 18-month hiatus while we concentrated on the balance sheet and the operations that had already been acquired. At this point, I'll 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 day everyone. Before Dave goes into the financials, I will provide a few highlights of our operations as we continue to grow and implement our acquisition strategy. I'd like to start off by mentioning how pleased we're with our latest results. As Brendan just stated although we reported a slight dip in revenue in the winter quarter, we've continued to drive improvements in margins and cost savings so much so that we generated a 46% improvement in our adjusted EBITDA, which is an impressive result. First, let's delve into some of the factors that are contributing to our margin improvements. As mentioned previously, we've worked over the past few years to reduce our workers compensation claims and this is translated into over a $0.5 million of insurance cost savings per year. This initiative was spearheaded by our Safety Committee at Monroe Staffing, our largest subsidiary, and the result is now positively impacting all of the subsidiaries in the United States as a result of the lower rates. This is a major win as we continue to streamline expenses and increase economies of scale. Another factor that has led to improvements in our margins is the increased volume we've experienced with our permanent placement divisions in the UK market. This volume is a direct result of some of the strongest placement numbers we've seen from our UK subsidiaries, and we believe this has been driven by our new initiatives across Longbridge and The JM Group and our combined London office. For instance, we mentioned on the last call that in the UK, our top recruiters are participating in several business development events. Some of these new opportunities for collaboration included an event hosted by our new Longbridge CEO, Richard Pickard, who has over 25 years of experience and is the former Director of Financial Services at Oliver James Associates. In addition at our Monroe Staffing subsidiary, we're deploying programs like our workforce management solution, which manages large contingent workforces upwards of 100 plus temporary associates within specific clients. We're currently operating a handful of such large programs and recently signed two additional agreements that should kickoff in the early summer. We're also instituting our companywide cross-selling program that is already starting to make progress. These strategies help further entrench our client relationships, supporting our organic growth goals. Lastly, we've consolidated few of our smaller satellite offices that had overlapping sales markets in the U.S. as part of our hub model. We should start to see fewer leases and thus less overhead with the same sales initiatives going forward, which is an exciting prospect. Combined with efficiencies realized through group insurances across all of our subsidiaries and combined 401(k) policies and plans, we continue to further optimize our business and streamline our expenses. In summary, we are pleased with the synergies we have achieved and our improvements in gross margin and adjusted EBITDA. Our employees have done a fantastic job improving these metrics and we thank them for their strong work ethic and dedication. I’ll now hand the call over to David Faiman, our Chief Financial Officer for some of the financials. Dave?

[David Faiman:]

Thank you, Matt, and good morning everyone. For the first quarter ended April 1, 2017 revenue was 40.7 million, a 5.7% decline from prior year of which 1 million or 2.3% is from foreign currency translation. The remainder came from four fewer working days quarter as compared to prior year due to weather related stoppages and reduced demand from one significant client. These two events are estimated and had 1.8 million and 0.8 million impact repetitively. Of that revenue, 55% was from light industrial clients, which grew organically 5% during the quarter and 45% from professional clients which declined due to foreign currency translation and the matters I discussed earlier. Gross profit for the quarter was 7.3 million, an increase of 1.4% while revenue declined. This was offset by higher margins in both the light industrial and professional sectors, coupled with lower worker compensation and payroll cost. Operating expenses were essentially flat during the quarter versus prior year; however, cash operating expenses which excluded depreciation and amortization declined 4.4%. Result of the performance is a loss from operation of 1.1 million which basically flat to prior year. Other expenses increased 1.1 million mainly from debt extinguishment loss of 1.4 million relating to financing transactions during the quarter. Excluding that charge other expenses declined $260,000. The net loss for the period of 3.5 million which includes the 1.4 million debt extinguishment charge was 0.7 million higher than the prior year. Excluding that refinancing charge, net loss would have improved 600,000. Finally, adjusted EBITDA for the quarter of a $1 million was an improvement of 46% over the prior year quarter. Bring our trailing 12 months adjusted EBITDA to 5.3 million, a 57% increase over the comparable trailing period. This translates to operating expenses as a percentage of trailing gross profit of 83.3%, an improvement from 87.6% for the comparable period. Turning now to the balance sheet, our working capital deficit improved 2.2 million and stockholders' equity was unchanged since December 31, 2016. Our gross debt of 12.5 million increased by 3.5 million since December 31, 2016, which include 7.4 million of the total 9 million raise from Jackson Investment Group. However, applying the trailing 12 month adjusted EBITDA of 5.3 million, our leverage ratio defined to total long-term debt gross of debt discount plus earn-out, less the assets held for long-term obligation improved to 1.7 times from 2.4 times for the comparable prior period of 2016. Subsequent to quarter end, the Company closed an additional 2 million of financing, the majority of which was from Jackson Investment Group. Finally, turning to cash flow, cash flow provided by operating activities during the quarter was 2.4 million reflecting the growth in revenue during the calendar fourth quarter of 2016 and includes the payment made to accounts payable from the proceeds from Jackson Investment Group. At this point, I’ll hand the call back to Brendan before we open it for Q&A.

[Brendan Flood:]

Thank you, Dave. The focus of the organization over the coming months and quarters will be on continuing to one, improve the balance sheet; two, execute on our M&A strategy; three, continue to improve our operational performance. On June 15th, we'll host a Special Shareholders Meeting to approve the migration of the Company's domicile to Delaware from Nevada and also to complete the requirements of the various investments by the Jackson Investment Group across January to April. As we make progress on these initiatives, we'll make announcements in order to inform the investment community. Operator, at this point, I would like to hand the call over to a Q&A session.

[Operator:]

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from William Gregozeski from Greenridge Global. You may ask your question.

[William Gregozeski:]

With the reduction from one of your larger clients, is that in the U.S. or in the UK?

[Matt Briand:]

That was in the U.S.

[William Gregozeski:]

What caused the decline, the year-over-year decline in the UK business?

[Matt Briand:]

We had a bit of a slowdown in the contract business and the majority of the business over in UK is contract, both in the IT and the finance and accounting segments. Since then, we've had the business in both of those groups has ticked up and it's shown a month-over-month improvements since January.

[William Gregozeski:]

And then I guess just higher level with the -- going back on the M&A stuff, are you guys seeing any greater level of comfort from the targets with your balance sheet makeover and Jackson kind of behind you? Or is it making any difference at all?

[Brendan Flood:]

Thanks Bill. This is Brendan. I think in general, the number of potential acquires that are coming in our direction has not declined. I'm fielding two or three goals every week. Matt is doing something similar. Dave is doing something similar. So, I think the general comfort in terms of our organization, nobody specifically sat there and said, hey I want to go through your balance sheet. Most of them talk about the strategic plan, and where we're going and why we're going there and why they would want to be part of it. So, I think the comfort with the organization continues to get better and the desire of acquisition targets to become part of Staffing 360 also continues to increase.

[Operator:]

Our next question is from Bill Relyea, Midtown Partners. You may begin.

[Bill Relyea:]

In terms of the acquisition target pipeline. One, is there any bias stores increasing the balance stores professional? And two, do you maybe see expanding the Company's horizon somewhat geographically within the U.S.?

[Matt Briand:]

Some of that comes down to pragmatism at the time. So, at the moment, our business is roughly spilt at a gross profit level about 51% light industrial, 49% professional. If you look at the staffing industry as a whole, roughly 50% is staffing light industrial. So, taking a longer term view, I would expect that we'll grow as quickly in light industrial as we'll in professional, and a shorter term view, it really depends upon what the next target at the bus stop is. In terms of geographic expansion, we have stated regularly that we are only interested in United States and United Kingdom. In terms of -- in the United States, we have expanded over the last couple of years, out of New England and heavily into North Carolina. We would like to be in some more sunshine states and there is very good sunshine states that they would well establish staffing practices, which would take the bias way from 16 feet of snow in Massachusetts in the month of January and February.

[Bill Relyea:]

Good.

[Matt Briand:]

So yes we would like to diversify from a geographic perspective would in the United States.

[Operator:]

[Operator Instruction] Our next question is from [Kevin Johnson], he is a private investor. You may begin.

[Unidentified Analyst:]

I just have questions about the Jackson Investment Group participation. I know they are coming and meeting. We have some votes coming on from the participation of that. Where do we see that going in the future? Or do you expect them to be or these votes to help them become a better partner on helping with acquisitions in going forward? Or is this just taking care of the stuff that they have already done?

[Matt Briand:]

So, probably couple of questions in there. Firstly, it was a great honor for the entire management team to have the strategic investor like Jackson Investment Group get involved in the Company, particularly given the history of that organization in the staffing industry and how well they know the staffing industry. The extent to which that they are -- The extent to which there will be additional investments going forward, I mean its open, but as would every individual investor out there, investor will make the decision based upon what it is driving us to invest them. So, right now, I can't tell you that it would be additional funds. I can't tell you that there won't additional funds. As we get sufficiently strong prospects for somebody to invest in then the Jackson Investment Group will make its own decision to whether they want to participate or not. But I’ll say that one of the principal reasons that investment came in the first place was the strategic plan of the Company and the manner in which we have been executing on it and intent to execute on it will be course of next couple of years.

[Kevin Johnson:]

So they have shown interest in at least reviewing and looking at any potential forward offers?

[Matt Briand:]

Correct.

[Operator:]

[Operator Instruction] Okay, that marks the end of our question-and-answer session today, if anyone in the team has any closing comments.

[Brendan Flood:]

Okay, thank you operator. So, as you heard on this call, there was a lot happening within the Company and also outside of the Company. You've heard me say this many times as the closing remarks, but as a management team we remain committed to growth in revenue, to growth in earnings and to growth in general value. Operator, that is the end of our call, thank you all again. Have a great present day.

[Operator:]

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