Volt Information Sciences, Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Jun 2019

[Operator:]

Greetings, and welcome to the Volt Information Sciences Inc. Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Please go ahead.

[Lasse Glassen:]

Good afternoon, and thank you for joining us today for Volt Information Sciences' fiscal 2019 second quarter earnings conference call. On the call today are Linda Perneau, President and Chief Executive Officer; and Paul Tomkins, Senior Vice President and Chief Financial Officer. A question-and-answer session will follow with their prepared remarks. By now, everyone should have access to the news release, which was issued after the market closed today. If you've not received the release, it is available on Form 8-K filed with the SEC and in the investors section of Volt's website at www.volt.com.Before beginning our prepared remarks, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to Volt Information Sciences' recent filings with the SEC for 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 will provide useful information for investors. A reconciliation of those measures to GAAP measures 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 President and CEO, Linda Perneau. Linda?

[Linda Perneau:]

Thank you, Lasse. Good afternoon, and thank you for joining us today for our fiscal 2019 second quarter earnings conference call. I'll begin today's call with an overview of recent financial performance, as well as an update on several key operational highlights. Paul Tomkins, our Chief Financial Officer, will then provide additional details about our second quarter financial results.Our performance in the second quarter reflects the ongoing execution of the operating strategy we embarked on one year ago designed to specifically enhance our sales engine, improve margins, and drive profitable growth. Overall, it was a very busy and productive period for the company. And since we too during the quarter pointed to the continued progress we are making in building a strategy for an enduring and profitable organization. Within our North American staffing segment, we implemented a key structural enhancement to our nation-wide branch network that will continue to improve overall operational efficiencies, and drive operational excellence. We also made important changes to our international staffing segment which included a change in leadership. And finally, we commenced the decommissioning effort of our customer care solutions business or VCCS, which you may recall, was an outsourced contact center delivery model for one large customer. This particular customer generates multiple revenue stream for Volt, and will continue to be a key staffing customer. I will discuss each of these endeavors in more detail but first, let's review highlight of our second quarter financial results.After a strong first quarter, with total company same-store net sales grew nearly 1% year-over-year we faced headwinds during the second quarter across the enterprise. Our North American staffing segment slowed as expected in the quarter, and the international segment and VCCS continues to disproportionately impact overall company results. Despite the headwinds, the ongoing execution of our sales and delivery strategy coupled with strong performance in our North American MSP segment helps us to mitigate the year-over-year total company revenue decline in the quarter to approximately 3% on a same-store basis.For the first two quarters of fiscal 2019, our total company revenues declined 1.4% year-over-year on a same-store basis. This compares favorably to a 9.1% same-store revenue decline for the same period one year ago. The vast majority of this decrease resulted from disproportionate declines in international and VCCS. Importantly, in North American staffing, our largest business segment, revenue during the first two quarters of fiscal 2019 is roughly in line with prior year. Our ongoing focus on pricing discipline once again contributed to a year-over-year improvement in our growth margin during the second quarter. On a consolidated basis, Volt's has now generated high year-over-year margins for three sequential quarters. In our North American staffing, specifically, we continue to realize improvement in our markup due to ongoing pay, bill and pricing efforts.We also continue to see benefit from our cost containment initiatives, an effort towards ongoing operational efficiencies which in total, resulted in a sharp year-over-year reduction of $4 million in selling, administrative and other operating costs. Our success in these key metrics during the second quarter contributed to the year-over-year improvement in our operating results and adjusted EBITDA. Thanks to the hard work and commitment of Volt's employees around the globe, we have been able to make notable progress in the past year. We are making great strides on our transformational journey and are just beginning to realize the tremendous potential throughout the organization.Now, let me switch gears and discuss some of the key second quarter operational highlights of each of our business segments, starting with our North American staffing segment. For the second quarter, our North American staffing segment experienced a revenue decline of 4.2%, largely driven by headwinds related to expected headcount reductions referenced in our Q1 earnings call, as well as unusually large unanticipated headcount reductions from two particular customers. The two customers, in unrelated industries, together reduced our headcount by over 1,500 due to workforce adjustments caused by their own lower business demand. Throughout the quarter, we continue to aggressively execute on the foundational aspects of our strategic roadmap. Key elements included an organizational restructuring that has aligned both, with a competitive advantage to focus on areas where we are better positioned to win including retail and middle market customers.We have also built a much more robust sales organization and are operating in multiple distinct sales channels. This has helped us create a deeper and wider sales funnel bringing in more new business opportunities across the enterprise. The combination of these initiatives has had a dramatic impact across our North American staffing segment, and allowed us to minimize declines year-over-year. This is evident when we look at the total declines across our North American staffing segment for Q2 offset by the increases, including new business and growth in existing customers. We made up quite quickly approximately 81% of this headwind due to the strength of our robust sales and delivery engines.In addition, we continue to experience positive growth in our retail business. This marks the fourth consecutive quarter of retail revenue growth. As has been the case over the past three quarters, the growth margin for this retail business continues to outpace the overall segment average by approximately 500 basis points. Gaining momentum in this area remains a key priority for us and we are investing intently in additionally sales and delivery resources to ensure we reach our ambitious goal.Our strategic solutions group sales team has been hard at work building pipelines, attending meetings and presentations with prospects, and accelerating deals to contract the weakened sales position in short order. We have multiple wins being implemented in the third quarter, several of these confirmed wins, each over $1 million in annual potential include transitioned employee headcount which leads to immediate revenue uplift for Volt. We are expecting to add several hundred new field employee headcount in May, June and July. The outlook for ongoing momentum is promising as evidenced by the increases we're seeing in the number of presentations, pricing proposals and contract reviews being conducted in conjunction with potential opportunities.As I noted in my introductory comments, during the quarter we initiated and completed a restructuring enhancement of key roles and responsibilities within our nation-wide branch network. As part of this action, we redesigned the structure of our branches to provide additional high level support for key branch functions including operations, front office systems and talent onboarding. This also included an overhaul of responsibilities and a significant internal headcount reduction of branch coordinator, a non-revenue generating role. Although we are already seeing operational improvements and gains in cost efficiencies as a result of eliminating the role company-wide, this action did result in certain initial disruption at many of our branches which we believe affected our operational performance during the second quarter.With this now behind us, we are seeing early positive momentum in several leading indicators including order volume and placement. Again, another optimistic sign as we look forward to the second half of the year. In fact, during the first several weeks of Q3, we are seeing order volumes rebound to Q1 levels which were some of the highest levels in multiple quarters. Additionally, placements are also gaining traction week-over-week, a strong leading indicator for upcoming weekly billings. Importantly, after a slow second quarter, direct higher billings are also improving to early Q1 levels.North American staffing segment continues to make solid progress on our strategic priorities focused on technology advancements to help improve our ability to connect people and work. Over the past year, we have been working vigorously to fully leverage our enterprise-wide front-office systems. Since that time, we have been actively integrating all intensive tools, processes and reporting with the objective of increasing visibility, productivity, and candidate availability. During our first quarter earnings call, I referenced several tools we were integrating to enhance sales effort, the candidate experience and candidate attraction. These tools have now been fully launched and I'm pleased to report that early in Q3, we are seeing a rapid uptick in our candidate applications. Ultimately, making more candidates available for our field teams, to more quickly make placement for our valued customers.In prior calls, I have also discussed multiple integration activities that will simplify, automate and improve it's efficiencies related to back office functions such as [indiscernible] and time capture. We remain steadfast in these efforts and anticipate full integration in the next several months.Now, lets turn to an update on the North American MSP segment, which comprises our Volt Consulting Group or VCG. During the second quarter, the VCG revenues expanded to $9.6 million, a promising increase of more than 50% year-over-year. Notably, VCG contributed $1.1 million of operating income for the quarter. Both, the payroll service solutions and MSP businesses performed well. There are multiple factors contributing to these results including growth and expansion of existing customers, as well as new business wins. I will share two points of note to demonstrate the validity of our sales strategy.During the second quarter we won a new key payroll service customer through sales effort by our Strategic Solutions Group. This opportunity did not align with our North American staffing segment for multiple reasons, however, because the customer's requirements would be better served under VCG's payroll service delivery model, the win was captured and resulted in a nice uplift in VCG revenues for the quarter. The second situation involves a long-term North American staffing customer who was exploring alternative partnership options given the maturity of their staffing program. Working together, the staffing team and the VCG sales team presented a next-generation MSP program which allowed Volt's to retain the customer and support a larger, broader program going forward.We successfully completed the transition during the second quarter and we expect more customers to transition to a managed service delivery model and transfer from North American staffing to VCG going forward. Again, these examples confirm that our robust sales engine strategy is paying off and now with greater collaborations, the teams overall are able to be more agile in servicing a customers needs, driving customer retention and satisfaction.Moving to our international staffing segment, during the quarter revenues declined 9.7% year-over-year or 2.3% on a same-store basis excluding the impact of foreign exchange. While we have seen declining revenue in this segment over multiple quarters, the business remains accretive from a gross margin and operating income perspective, given the focus entirely on professional skilled placements. The international staffing segment main challenge has ben driving top line growth. To immediately address this, we’ve changed the leadership of the business with the internal promotion of Ben Baffin [ph], to Senior Vice President and Managing Director, International. Ben has a wealth of experience with over 16 years of specific staffing industry experience including roles with notable companies such as Hayes and Kelly Services, where he was responsible for operations in Singapore and Malaysia. Ben joined Volt's in 2012 to establish and build the Singapore operation. Over the last 7 years, Ben has build a very strong team focused on permanent and contract recruiting in the professional and technical skilled function. He has consistently exceeded financial targets including exiting 2018 with nearly 45% year-over-year revenue growth. Ben will be relocating from Singapore to the United Kingdom and will be based in our Redhill office. He will report directly to Lori Schultz, our Chief Operating Officer. While Ben has only been in this role for a few weeks, he and Lori have already started to make improvements driving a greater emphasis on new business generation and sales growth. I firmly believe that with strong leadership, we can return our international staffing segment to growth trajectory.And finally, within our corporate and other category, during the quarter we commenced efforts to decommissioned the customer care solutions business unit or VCCS. In prior earnings call, we have noted the steady declines we have experienced from this business unit over multiple quarters. In recent years, this business unit has been a loss leader creating a disproportionate impact in our top line, margin and operating income. The high fixed cost in this particular model made it prohibitive to respond quickly to market fluctuations and customer demand. This departure from a model that is not a core business function will allow us to refocus and align our resources to ongoing general staffing excellence in the remaining revenue streams for this valued customer.Throughout the quarter efforts were underway to redeploy many of our existing employees to alternate opportunities, vacate two sizeable call-center locations, and ensure a harmonious transition without disruption for the customer. The timing was right, the decision was sounds, and further supports our commitment to maximizing long-term value for our shareholders.With that, I would now like to turn the call over to Paul Tomkins, to review Volt's second quarter financial results. Paul?

[Paul Tomkins:]

Thank you, Linda, and good afternoon, everyone. Our teams made good progress during the second quarter in many areas. Despite the revenue headwinds we experienced during the second quarter, we showed year-over-year improvements in gross margin percentage, SG&A, and bottom-line performance. I look forward to discussing our progresses in these areas today.In the second quarter of 2019, total company revenues were $252.1 million, down 4.2% year-over-year. On a same-store basis which exclude a business exited and the impact of foreign exchange, total company revenue declined 3.3% on a year-over-year basis. North American Staffing revenues were $208.9 million in the second quarter, down 4.2% on a year-over-year basis. As Linda noted, we are working hard on driving profitable revenue growth in this segment and we are pleased to see the benefits of some foundational changes in our sales organization as we were able to make up a good portion of the revenue loss we experienced with new customer wins and other RINs [ph], many of which will benefit the third quarter and beyond.Revenues in our International segment were $28.8 million. International revenues declined 9.7% on a year-over-year basis and were negatively impacted by foreign exchange. On a same-store basis, excluding the impact of foreign exchange and businesses exited, international revenues declined by 2.3% year-over-year, primarily due to continued lower demand in the United Kingdom. Revenues in our North American MSP segment were $9.6 million, an improvement of $3.2 million or 51% year-over-year due to increased demand for payroll services and managed services from new and existing customers. Finally, revenues in our Corporate and Other category were $5.4 million, down 30.5% as a result of lower demand at our customer care solutions business unit. For a relatively small part of the overall business, the revenue decline was outsized. As noted, we have commenced efforts to decommission and will be fully exited from this business unit during the third quarter which will enable us to focus and align our resources on our core staffing business.While we are working hard to improve topline revenue growth, we also remain focused on improving gross margins and expense reductions activities designed to drive our corporate costs and overall SG&A towards industry standards. We were very pleased with the successes we've experienced in these areas in the second quarter.Our total company gross margin of 14.4%, improved 20 basis points year-over-year, and represent the third consecutive quarter of gross margins improvement. Contributing to the gross margin expansion were lower payroll taxes and improved pricing discipline in our North American segment. International margins also improved year-over-year, partly driven by stronger, high margin direct higher revenue in all markets. These improvements to gross margins were partially offset by lower margins in our customer care solutions business driven by reduced customer demand and therefore lower headcount in these two facilities.We are also continuing to benefit from our efforts to reduce costs throughout the business with selling, administrative and other operating costs improving $4 million or 9.3% year-over-year to $38.9 million. These improvements continue to be driven by efficiencies in our processes, and reduced facility cost. As a result, SG&A as a percent of revenue improved to 15.4% compared with 16.3% a year-ago, and 15.7% in the first quarter.Turning to our total company operating results for the quarter. Adjusted EBITDA was negative $1.5 million in the second quarter compared to negative $3.7 million in the year-ago period. Net loss was $5.2 million in the second quarter of fiscal 2019, compared to a loss of $7.7 million in the second quarter last year, and included $1.1 million of restructuring, severance and impairment costs. Approximately, half of these costs in the quarter are related to ongoing restricting efforts throughout the company. The remaining amount is attributed to the decommissioning of our customer care business. In addition, we will anticipate incurring approximately $1.4 million to $1.6 million of restructuring cost in the third quarter as we exit facilities related to our customer care business. The activities are necessary to properly exit this business which will help improve our margin and operating results going forward.Operating income in our North American Staffing segment was $2.5 million in the second quarter, an improvement of $0.9 million or 82% compared to $1.6 million in the year ago period resulting from improved gross margin and reduced operating expense. Operating income in our International Staffing segment was $0.6 million, down $0.2 million compared to a year ago period driven mostly from the increased restructuring cost related to the change in leadership. Operating income for our MSP business in the second quarter was $1.1 million, an increase of $0.7 million compared to the second quarter of fiscal 2018, primarily due to strong margin from both, our managed and payroll service revenues. For the six months ended April 20, 2018, our net loss was $8.4 million, a significant improvement of $10 million or 54.5% compared to a net loss of $18.4 million in the prior period. In addition, last year included an income tax benefit of $1.4 million primarily due to the reversal of reserves on uncertain tax provisions that had expired.Shifting to our liquidity position; at the end of the quarter, we had a total of $52 million in global liquidity in line with the prior quarter. Our global liquidity at the end of the second quarter was comprised of approximately $30 million in cash in banks, and $22 million in borrowing availability.With that, I'd like to turn the call back to Linda. Linda?

[Linda Perneau:]

Thank you, Paul. What remains clear from the results we achieved thus far is we are making progress on our transformation journey. As evidenced by expanded margins year-over-year for the third quarter in a row, lower SG&A costs and sharply higher profitability metrics. Yet as Q2 demonstrated, transformation is rarely a linear process. The revenue headwinds experienced in Q2 will impact our business outlook for Q3 as well. We expect a Q3 consolidated same-store year-over-year revenue decline similar to what we experienced in Q2.Overall, I'm confident that we are executing on a winning strategy with the right team at the helm, and the business is being managed well. We are demonstrating strong cost controls and management. In Q2, we have positive free cash flow and we are realizing significant profitability improvements. In the long run, I know and my team knows that in order to achieve our ambitious goals, we must get back top-line revenue growth. Some of the business from the two customers referenced previously will come back. We don't expect that these declines are sustainable long-term for their business, but we are not waiting for that. We will aggressively push to win more business. We are confident the top-line will turn, whether that's in one quarter or several quarters, it is too early to say. We will have these fluctuations, however, we are a much better position to wither [ph] and to mitigate impact and we will recover from this.We look forward to improved financial performance as we grow and execute on our business strategies in the quarter's to come.Now, I would like to open up the call for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Joshua Vogel with Sidoti & Company.

[Joshua Vogel:]

I guess my first question is around -- its good to see you're beginning to decommission the customer care unit. I guess, you know, given that business is run through the corporate and other segment and included corporate costs are alike; is there anyway to give us a sense of where that business was particularly running from a gross margin and a profit/loss standpoint?

[Paul Tomkins:]

Yes, sure. So that business is generating at this point, in this quarter, negative gross margins. And bottom-line, that business -- if you were to look at -- I guess a good to look at it would be trailing 12 months. That business really generated about 1.2% margins over the last year and about $1.4 million in negative bottom-line ROI.

[Linda Perneau:]

And the margin percentage, Josh, was low single digits.

[Joshua Vogel:]

Are you potentially going to be reimbursed for any of the restructuring related costs from that customer?

[Paul Tomkins:]

Well, one of the things we're doing is reaching out to other suppliers to absorb some of the headcount, absorb some of the equipment. So, to the extent we can, we are definitely doing that, and that is helping mitigate some of the transition costs.

[Joshua Vogel:]

And I guess outside of VCCS, do you foresee any restructuring or impairment charges hitting up later in the year related to your other activities to streamline the business -- the other business units?

[Paul Tomkins:]

Yes, we do. As you know, we're continuing to look at activities to continue to get more efficient and bring the SG&A down. So yes, we will see -- we indicated that we will have additional restructuring charges as we exit the facilities in the third quarter for VCCS but we will also have some other as well.

[Joshua Vogel:]

And you said that would be $1.4 million to $1.6 million?

[Paul Tomkins:]

That's right.

[Joshua Vogel:]

Shifting gears a little bit, obviously good to see ongoing gross margin improvements from year-to-year but I was little surprised by the sequential decrease there. I was just curious if there is anything there onetime in nature, perhaps something involving -- I don't know workers comp; I just wonder if you could talk to that?

[Paul Tomkins:]

Yes, sure. We do -- we did have a benefit in the first quarter on workers comp, so that was definitely a factor in the sequential. So you hit that one square in the nose. And we did -- we do generally have those fluctuations with things like workers comp or payroll taxes; as you go through the year, payroll taxes will drop-off as well but the big change was workers comp.

[Joshua Vogel:]

Okay, great. And I hope I'm not getting too much into the wheat [ph] here. When we look at those three customers that had expected reductions following record Q1s, and then Linda you mentioned the two unexpected reductions which you said I think resulted in 1,500 fewer headcount -- I was wondering if you could quantify what the revenue drag ended up being specifically when we look at those five customers from I guess Q1 to Q2, and then Q2 versus the year ago period; is that possible? I guess, I kind of also get a sense of the business outside of these clients; what type of growth did we actually see across the rest of the base of business in North American staffing?

[Linda Perneau:]

I don't know if I can quantify that for you, Josh. What I can tell you is that we did manage to makeup 81% of the overall decline that occurred from the headwinds that were expected from those three customers that I referenced in Q1 call, as well as these unanticipated, unusual headcount impacts from the two large customers that impacted us in Q2. So we did manage to makeup a five percentage of that overall decline.

[Joshua Vogel:]

And one more, if I may. Just looking at the guidance, obviously we're seeing a nice traction on the sales front but before getting there I guess first, so you were expecting to get out of VCCS entirely in Q3; so I'm assuming that you would take that out of your year-over-year same-store calculation? So, I was wondering if you can maybe get a little bit more granular around same-store expectations across each segment or is that something you don't provide? And also, I guess given that you expected to be similar to Q2, was that -- is that largely a factor of two new customer orders that unexpectedly declined in Q2?

[Paul Tomkins:]

Yes, that's correct. (Multiple Speakers).

[Joshua Vogel:]

And total work days in Q3; are they similar to…

[Paul Tomkins:]

Well, they are going to be lower, 63.

[Joshua Vogel:]

Okay. That is all I have right now. Thank you.

[Operator:]

[Operator Instructions] Our next question is a follow-up from Joshua Vogel - Sidoti & Company.

[Joshua Vogel:]

I figured out I will give someone else a chance, but if they are not, I'll hop-on for one more. I guess when looking at the business today, streamlined operations, tighter cost structure, sales engine in place that's starting to churn out new business. I'm curious when we look at other avenues of growth or expansion, would acquisitions be on the table, perhaps a bolt-on deal here or there? And if so, where do you see this happening with regard to maybe a geography or specialty that you think is a strong compliment to the existing platform?

[Linda Perneau:]

So, without being too specific I will tell you that it's conversations we have ongoing, we're constantly exploring different opportunities for how we're going to drive additional revenue streams and different options that there are for us, and certainly, acquisitions is one of many things that we consistently talk about.

[Operator:]

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Linda Perneau for closing remarks.

[Linda Perneau:]

Thank you. And thank you everyone for your support and for joining us on today's call. I'd like to mention that later this month, we will be presenting at the ID [ph] East Coast Investor Conference in Boston on June 12. We hope to see many of you there; otherwise, we look forward to speaking with you again when we report our fiscal 2019 third quarter results in early September.

[Operator:]

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