Volt Information Sciences, Inc.
Q4 2014 Earnings Call Transcript

Published: 16 Jan 2015

[Operator:]

Good morning. And welcome to the Volt Information Sciences’ Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to [indiscernible]. Please go ahead.

[Unidentified Company Representative:]

Thank you, Operator. Good morning and thank you for joining us today for Volt Information Sciences’ fourth quarter and fiscal 2014 year-end earnings conference call. On the call today will be Ron Kochman, President and Chief Executive Officer and James Whitney Senior Vice President and Chief Financial Officer. Before we begin today’s call, 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 variety of factors. We refer to 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 is included in the earnings release issued January 15, 2015. Now I would like to turn the call over to Ron Kochman, President and Chief Executive Officer. Ron?

[Ron Kochman:]

Thank you Julie. Good morning and thank you for joining us today. Before we begin I want to make clear that we will not be discussing or taking questions on matters related to shareholder nominations or the annual meeting. Our focus today is on our results for the fourth quarter and the year and our outlook. As you can see from our progress over the year and the actions that we have taken over the last several months. The Board of Directors and the management team are focused on doing what is in the best interest of all Volt shareholders. In fiscal 2014, we made tremendous progress in executing our strategic and achieved key milestones to enhance shareholder value. Our achievements included the completion of the expensive and distracting multi-yearly statements becoming current on our SEC filing requirements, making substantial progress in strengthening our financial controls and increasing shareholder liquidity by moving some of the over the counter Stock Market to the NYSE MKT Exchange. Most importantly, we made significant progress on our primary of achieving a more highly focused and profitable Volt. We have invested on non-core software businesses which could not attain our target levels of profitability. These were fundamentally different businesses from our staffing and services businesses with different risk and reward profiles. Our focus on profitability was evidenced by the divestiture of the VMS software business in the first quarter of fiscal 2014. The discontinuation of the telecommunication government solutions business in the second quarter. and the sale of the computer system segment which we announced in December 2014. In all, these actions will increase our profitability and cash flow by more than $20 million annually. Expedite the reshaping of Volt to generate greater long-term shareholder value and allow us to return additional capital to shareholders. On this last point, we announced a new share repurchase program earlier this week. We will make repurchases as we believe that Volt share price does not fully reflect the company’s underlying value. Turning to the businesses. As a reminder within staffing services segment we refer to customers that require a multi-location coordinated account management and service delivery and multiple skill sets as enterprise customers. While our retail customers are primarily any single location with sales and delivery handle primarily from a geographically local team and will relatively few headcounts on assignments and one or two skill sets. We also distinguish between traditional staffing services which we have paid on the time and materials basis for providing contentious path that work under the supervision of our customers as separates from staffing services where we provide additional services including project based services for which we sometimes pay on a basis other than time and material. In our staffing services segment we have been intently focused on improving operating income and margin, particularly in our North America traditional staffing services as well as reducing our exposures to customers with profitability or business terms are unfavorable. Two of the major changes that we made in North American staffing model, were moving enterprise accounts to a national rather than a regional account management structure and with all delivery being coordinated nationally. We believe that by focusing on superior delivery it will drive higher revenues and improve margins. Looking at the performance of the staffing services business in the fourth quarter we are encouraged by the progress as a result of our efforts to strengthen and realign the business. The segment achieved that 5.8% increase in quarterly pro-forma operating profit on an 18.2% reduction in revenue. In addition, fourth quarter pro-forma operating margin was 3.6% compared to 2.8% in the year-ago period and 80 basis points improvement. This progress is primarily a result of the reorganization of the North American staffing operation as well as the improved profitability in project-based staffing, improved NSP results, and lower cost as a result of the divestiture of the VMS software business. During fiscal 2014, we focused on increasing profitability, their initiatives to expand margins and reduce operating expenses and we are pleased to report on the progress we have accomplished. We started to see the positive results of the continuing initiatives to reduce exposure to customers with unfavorable business terms and improved efficiencies. For the full year, pro-forma operating income excluding the $3 million indirect tax recovery for the segment increased by $2.1 million while 9.4% versus last year to $23.5 million. Consistent with our goal to return the company the profitability we have made strategic and operational changes in our organization to focus on offering on our core skill sets in the industries we can consistently outperform the competition. Average daily revenue for North American staffing business increased slightly for the fourth quarter compared to the third, marking the second sequential quarterly improvement since we began our initiatives. Also for the second consecutive quarter, our increase business with favorable churns with existing and new customers offset reductions as customers really to decrease demand or unfavorable business terms. We are very encouraged by this positive trend. We do however anticipate that it should take approximately two more years to complete the renegotiation or exiting of unfavorable contracts due to the terms of the staffing contracts as we have previously mentioned. Our other segment had lower pro forma revenue and profitability for the fourth quarter primarily resulting from the telecommunications, infrastructure, security services and printing businesses, as well as lower margins and decrease volume in the information technology infrastructure services. Looking ahead, our strategic priorities remain consistent. We will continue to evaluate our individual businesses in service offerings as we seek to prioritize profit over top-line growth. We are confident that these actions will continue to improve our results, as well as for the consistency of our returns across our portfolio of businesses. Our top priority remains profitability and we believe that our reorganization along with our focus on profitable business will drive higher revenue and enhance shareholder value. In summary, 2014 was a pivotal year for Volt. We are encouraged by the financial and operating performance achieved during the last quarter, as well as a significant progress made in implementing our strategic vision in 2014. We remain fully confidence in our ability to achieve profitability in the near-term as well as our targeted profitability level in line with or exceeding industry averages over the next few years. We’re also committed to providing transparency into this ongoing process and will continue to highlight key milestones and goals in the coming quarters as the company continues to progress. Now I would like to turn the call over to Jim to discuss our financial results.

[James Whitney:]

Let me start with the brief overview of our full year results and then I’ll turn to discussion of our fiscal fourth quarter for 2014. As Ron discussed earlier, we divested the computer systems business during the first quarter of fiscal 2015. Therefore, the results of a Computer System segment are presented as discontinued operations and as such have been excluded from continuing operations and from segment results for all periods presented. Net revenue decreased by about 15% to $1.7 billion for the fiscal year, down from $2.0 billion last year. The change was primarily driven by a 16% decrease in staffing services revenues, which decreased approximately $300 million versus last year to $1.6 billion and because this year consisted of 52 weeks, while last year had 53 weeks. Operating results for the full year of 2014 were $4.8 million an improvement of $12.1 million from a loss recorded last year and pro forma results improved $15.4 million to $2.1 million. Operating income and pro forma operating income for the full year included restatement, investigations and remediation expenses of $5.3 million, restructuring cost of $2.5 million and a $1.0 million cost in our workers compensation program related to multiple previous years. Without these items, we would have had operating income of $13.6 million and pro forma operating income of $10.9 million for fiscal 2014. In comparison, operating results for the full year of 2013 were $7.3 million, pro forma of 13.3 million and included restatement and associated investigation expenses of $24.8 million, restructuring cost of $0.8 million, $3.0 million indirect tax recover related to multiple previous years and approximately 1.1 million of operating income from the 53rd week in 2013. Without these items we would have had operating income in 2013, $14.2 million and pro forma operating income of 8.2 million. The net loss in fiscal 2014 of $19.0 million were $0.91 per share, pro forma of $21.7 million compared to a net loss in fiscal 2013 of 30.9 million or a $1.48 per share and pro forma of 37 million. In addition to the items mentioned above fiscal 2014 included a 1.4 million true-up of non-U.S. income taxes related to multiple previous years. Without the previously mentioned items, net income in 2014 would have been $6.8 million and pro forma net income $4.1 million, compared to fiscal 2013 net income of $8.7 million and pro forma net income of $2.6 million. The direct cost of staffing services revenue decreased by 16.5% to 1.4 billion. This decline primarily resulted from fewer continued staff on assignment consistent with the related decrease in revenues although somewhat offset by improved margins. The direct margin of staffing services revenue and performance staffing revenue was 15.0% and 14.9% in 2014 compare to 14.3% and 14.1% respectively in 2013. This improvement was primarily due to the actions we have taken including the reorganization of the traditional staffing services, the divestiture of vendor management software business, our continued initiative to reduce exposure to customer with unfavorable business terms and higher margins on our call center, game testing and other project based revenue. Staffing services segment operating income of $26 million decreased in $27.7 million last year. Our pro forma operating income in 2014 of $23.5 million increased 9.4% from $21.4 million last year. The 2013 numbers included $3 million tax recovery related to multiple previous periods, so on a comparable basis the staffing services operating income increase would have been 1.3 million in 2014 and the pro forma operating income increase would have been 5.1 million. This improvement was driven by decrease administrative another operating cost, the reorganization of the traditional staffing business, the divestiture of the VMS software business, our continuing initiative to reduce exposure to customers with unfavorable business terms and improved results in our call center game accessing other project based staffing services. The other reportable segments in that revenue decreased by 5.7% compared to last year to 111 million. Operating loss for this segment was 0.8 million from income of 1.7 million last year. Now turning to our fourth fiscal quarter because fiscal 2014 consisted of 52 weeks while last year had 53 weeks, the fiscal fourth quarter of this year had 64 workdays as opposed to last year’s 69 workdays. We reported net revenue of approximately $430 million down approximately 18% on a year-over-year basis. GAAP property and income was $6.1 million, a decline from $10.3 million in the year ago period while pro forma operating income of $6 million decreased from $8 million in the year ago period. Our fourth quarter net come was $2.1 million or $0.10 per share and pro forma was $2.0 million and included restructuring was $0.7 million. Losses from discontinued operations of $2.4 million and a $1 million cost in our workers compensation program related the multiple years. Now these items net income in the fourth quarter of 2014 would have $6.2 million and pro forma net income $6.1 million. Net income in fourth quarter of 2013 of $1.6 million or $0.08 share per share, pro forma loss of $0.7 million included restatement investigations and remediation expenses of $2.4 million, restructuring cost of $0.2 million, losses from discontinued operations of $8.3 million and approximately $1.1 million of operating income from the 53rd week in 2013. Without these items net income in the fourth quarter of 2013 would have been $11.4 million and pro forma net income $9.1 million. Turning to the details, total staffing services segment net revenue was $403.1 million, pro forma $403.0 million, in the fourth quarter fiscal 2014 down 18.2% compared with the same quarter of last year. This resulted from lower demand primarily at large enterprise customers but also to a lesser extent at retail customers, and our continuing initiative to reduce exposure to customer with unfavorable business terms and with respect to GAAP results 1.8 million higher net staffing unrecognized revenue. However as Ron mentioned our average daily revenue increased approximately 0.3% sequentially from the third quarter. North America traditional staffing revenue was compared of 82% from our enterprise customers and 18% from our retail customer. For the fourth quarter North America traditional staffing revenue was down approximately 19%. Revenue from Europe, Asia and South America services was down approximately 2% while our call center, game testing and other project based revenue and our managed service program revenue were down approximately 20% compare to the same quarter last year. The direct cost to staffing services revenue decreased by 19.1% to $337 million in the fourth quarter. This decline primary resulted from fewer contingent staff on assignment consistent with related decrease in revenues. The direct margin and staffing services revenue of percentage of pro forma staffing revenue in fourth quart was 16.4%, an improvement from 15.1% in the year ago period. This improvement was primary due to the actions we have taken including the reorganization of the traditional staffing services, the divestiture of the VMS software business, our continued initiative to reduce exposure to customers with unfavorable business terms and higher margins on our call center games testing and other project based revenue. In the fourth quarter staffing services segment operating income of 14.5 million decrease from 15.5 million in the year ago period while pro forma operating income of $14.5 million increased 5.8% from the $13.7 million in the year ago period. This change is driven by decrease administrative and other operating cost, the reorganizational attritional staffing business the divesture of the VMS software business, our continuing initiative to reduce exposure to customers with unfavorable business terms and improve results in our call center games chasing another project based staffing services. In the fourth quarter the other reportable segment revenue of $26.6 million decreased 24% due to lower volume in the information technology infrastructure services, telecommunication infrastructure and securities services and in printing business. Other reportable segment operating loss of 0.8 million in the fourth quarter compared to operating income of $2.1 million in the year ago period and pro forma operating loss of $0.9 million declined from pro forma operating income of $1.6 million in the year ago period. The decrease in operating income reflected lower volumes and lower margins. Moving on to the balance sheet we ended the quarter with $9.1 million in cash and cash equivalents and additional $10.4 million of cash restricted as collateral for foreign currency credit lines and banking facilities. We also had approximately 27.4 million available under the short-term financing program. Excluding the $8.1 million of long-term debt both the consolidated borrowings were $128.5 million. As announced earlier this week the Board of Directors authorize the repurchase of up to 1.5 million shares, this repurchase program reflects the board and management teams strong confidence and our growth prospects and our ability to generate profits and cash flow. We also demonstrate our commitment to delivering increased value in returning capital to stock holders. We have the ability right now to repurchase up to $5 million of our stock annually under the conveyance of the only the credit agreement that we have a restriction on such repurchases. As of today we do not have any balances outstanding under that agreement and it expires in March of 2015. While we remain focused on investing capital we’re needed to fund growth of our core businesses. We’ll also make share repurchases as option is arise as we believe the stock buyback program is in the best interest of our stockholders. Regarding our debt I would like to remind everyone the details of our borrowings are included in our Form 10-K in those details we discussed all of those current borrowings security either by cash or by other assets primarily account receivable from our North America staffing operations. Because of the losses we’ve incurred in recent years primarily associated with our statement our borrowings are primarily on a cash secured or asset back basis with borrowing at a percentage of the qualifying receivables. Borrowing under the accounts receivable securitization program and other short term borrowings decrease by 38.6 million and the collateral for foreign currency credit lines and banking facilities decrease by 21.3 million. In summary both demonstrated strong execution across our turnaround goals and strategic priorities to drive shareholder value as evidence by improved margin rates and net results. We’ve made steady progress in creating a more highly focused and profitable Volt especially in our staffing segment. We have strong momentum moving into 2015 and are excited about the opportunities ahead. Before we turn to Q&A I would like to address the news about Mayhew chosen to step down as CFO I was hired to help the company complete its restatement process, strengthen the company’s financial controls, build a strong finance team and partner with Ron in establishing and executing on the strategic plan. We have achieved many of the most critical milestones in this process over the past year and we’ve also made significant progress in improving both profitability and focusing the business for long term success. It’s now time for me to look for new challenge but then committed to ensuring the successful transition. Now we’ll be happy to take your questions. Operator, please open the call to Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joe Gomes with William Smith. Please go ahead.

[Joe Gomes:]

Good morning Ron and Jim and first thing just want to say, congratulations on the many accomplishments you guys had during this year especially in terms of refocusing the company on the core staffing business. My first question on the staffing operating margin increased nicely as you mentioned in the fourth quarter and for the full year was up to 1.63% and I just trying to get an idea of where your goals for that would be for the coming fiscal year and going forward?

[Ron Kochman:]

Good morning Joe and thanks for your comment. We’ve spoken previously about getting sustaining profitability up to 2% to 4% we all achieved that level of target profitability as we execute on our plan and focus on our core competencies and again both from the skill sets and industries where we are the strongest and we’re telling you one of three year plan and just continue to execute going forward.

[Joe Gomes:]

And just we’ve mentioned too about the move of the enterprise account to the national account management focus. And just wondering how that move was going, where you guys are somewhat in that move? What number of the enterprise accounts have already been moved over to that new national accounts program?

[James Whitney:]

All of the accounts have been moved over to the program and it’s been very well received by both our customers and our employees.

[Joe Gomes:]

Okay. And then just try to run, given the volatility we’ve seen here recently in the economy. Just wondering if you’re seeing any impacting here more recently on the business?

[Ron Kochman:]

We don’t talk about current financial performance and what we’ve seen the trends until we publish our results. But we’re doing okay. We’re pretty steady in our business.

[Joe Gomes:]

Okay. And last question here just would reiterate I know we’ve talked about this before about trying to get out a little bit more into the analyst and investment community and maybe doing a road show and analyst day I think would help even get the word out about the company even more. Thank you.

[Ron Kochman:]

Joe I agree with you and we’re actually planning on taking a trip in a few weeks, we’ll be right on the road. Thank you very much Joe.

[Operator:]

The next question comes from Matt Sherwood with Cooper Creek Partners. Please go ahead.

[Matt Sherwood:]

Congrats on a good quarter in the staffing segment. Just wanted to start, so if you look at the cash flow statement, it looks like if you back out the remediation cost and you take cash flow from ops from continuing operations and subtract investment cash flow. So you come up with like $41 million of free cash flow for the year. Some of which is admittedly working capital. And waiting now I guess with your credit facility you have $5 million availability for a buyback. If you guys generate another similar year of cash flow, what’s the plan with the other $35 million? It’s just like a buck $50 a share.

[James Whitney:]

That’s a great question. I would say as I pointed out that 5 million restriction expires in March, so I wouldn’t necessarily think that we would restrict share repurchases to just 5 million for the year. The Board has authorized 1.5 million shares and I think the intention is that as long as believe that the shares are below the price but undervalue that we should continue share repurchasing. So probably math that we would commit to that is probably north of 5 million. So we’ll sort of see how that develops during the year. Beyond that we don’t -- we think that having the borrowings we have a very good interest on the borrowings. We think that it’s in shareholder’s interest to continue financing receivables through debt. So we don’t see using the cash flow to pay down debt. And so therefore it’s available for other purposes as we think about reinvesting in the business and share buybacks are really the two areas of focus that we see going through the next year.

[Matt Sherwood:]

Then I guess just looking at the current quarter’s operating income, you guys did a 3.6% operating margin in Q4 that’s seasonally strong quarter. But I guess is there any way to sort of let us know where you want to aim your run rate basis because it’s a little given how weak Q1 was this year, it’s a little hard to sort of get a feel for where you are on that trajectory towards about 4% operating margins?

[Ron Kochman:]

That’s a great question Matt and going back to Joe’s question a minute ago about getting to investors one of the things we’re going to try and not try. One of the things we’re going to do is put out investor deck where we try to give little more insight into the business. Q1 is always a little quarter. Q1 will not have a margin like Q4, it won’t be that in any year and that has to do with as you know a lot of the fundamentals about what our cost structure looks like and how that tales off always in the later part of the year due to taxes and so forth -- employment taxes. So, what we’re looking at is trying to help people understand give a little more information to understand how those quarters sort of typically would stack up so that you can kind of see where we sort of measure against just sort of, let’s call the typical trend line. So we’ll put out some information so that all investors can get a better vision on that or better feasibility onto that.

[Matt Sherwood:]

Yes, I would look forward to that cause I mean I hear you that Q1 is in Q4 but also you typically I mean this is I think a first year in the recent memory where you have actually lost money in Q1 ’14 was. So that’s hopefully not the plan on a go forward basis.

[James Whitney:]

Yeah that’s right. Although I -- for what is worth I have done an analysis of Q1 goes back our Q1 for each year for many years going back and the staffing services segment, close to breakeven it’s sort of typical. I think we would agree with you we prefer that not to be a loss but it’s never been a significant quarter for us to have a significant amount of income, that as we move to that 2% to 4% Q1 can’t be a loss making quarter, you are just never going to get to those numbers. So we will absolutely give some more information on that, so people need benchmark.

[Matt Sherwood:]

Great, then I guess just on the revenue side. You guys said, you said improves revenue per day for the workday for the second quarter in a row and actually I mean even though you are still shading business, if you sort of take that logic forward you should be add a positive revenue growth rate by Q2, because you have been improving revenue per workday since then. So how do we look at the revenue trajectory as we balance in a growing the business with shading on profitable cost summary?

[Ron Kochman:]

So, if you think about it, we have started really doing a rationalization of the customers in the end of the first quarter to the second quarter last year. So right now if you are trying to model on that I expect it’s probably be relatively flat for the first half of the year with improvement in the second half in terms of daily revenue and total revenue.

[Matt Sherwood:]

That’s great. Can you share the breakdown that trends that you are seeing retail versus enterprise?

[Ron Kochman:]

So, as you know throughout 2013 in the enterprise as we have reported each quarter what we saw is weakness in our particular set of our very largest enterprise customers that thing is unique to those customers and not unique to both in other words all of their suppliers are just experienced a slowdown in the kinds of things that they used continue to [indiscernible]. So that we have seen some sort of gradual steady improvement across 2014 on that and continue to see that gradual steady improvement but no sort of significant leaps on that. So we expect to sort of see that steadily continuing. And then we have got this whole challenge that we are working through, working with the unprofitable customers and then that’s been offset by a lot of successes we are having with new customers. So it’s a kind of a mix of things and I think that’s what leads to runs common in terms of how we see it developing over 2015.

[Matt Sherwood:]

Okay, last one and I will let someone else to jump in, that the other segment. Is there any way I know it’s sort of consists of a money leasing directory premium business in Uruguay an ISO type business called a Mentek. Is there any way to segment that profitability between these two, because it appears to be reporting losses on a quarterly basis but seems like Mentek wouldn’t be a loss making business. I just trying to understand the dynamics in that segment.

[Ron Kochman:]

Right, there is a whole number of businesses in that other segments, some of which as you pointed out are profitable and some of which are loss making. We are continuing to look at those they are loss making and how to deal with that. And so that’s still on our list of things that we need to deal with. And then I think the reporting will get a little cleaner as we go forward and we will try call out and give you little more visibility into those details. They are combination of small businesses so it’s kind of a challenge to think about devoting a lot of that financial reporting to very small business units. But we will try and get more visibility on that because I understand your point.

[Matt Sherwood:]

I mean just broad brush , would you say Mentek which is imagine is the largest component of that segment is profitable?

[Ron Kochman:]

We haven’t disclosed the details in there but you are correct Mentek is a profitable business.

[Operator:]

[Operator Instructions]. The last question comes from Paul Latta with Glacier Peak Capital. please go ahead.

[Paul Latta:]

Good morning, thank you for taking my call this morning. Most of my questions have been answered but I did have a couple of small questions. First of all on the G&A expense, I think we have a little bit of a popping in Q4, is that just normal year-end effects or is there something unusual about G&A expense in Q4 this quarter?

[James Whitney:]

Yeah Paul, there are some unusual items and tried call those out in my prepared remarks. But we had some a number of expenses come through where we were -- for example I mentioned workers compensation program where we had a true-up related to multiple years. so, we had some things in there that aren’t typical for any quarter and so that’s why you see that downstairs and I try to give you the details in the text as well as in the earnings release and we try to call that out, I think when you see our 10-K filing we’ll try to call that out to help you kind of evaluate that and hopefully we’ve done a good enough job there if you can kind of see what the numbers might have been without those items.

[Paul Latta:]

The sounds from a modeling perspective maybe that we’ll be back to sort of a normal level of G&A for Q1, Q2 and what not going forward…

[Ron Kochman:]

That’s right.

[Paul Latta:]

Sound reasonable. Also question for Ron, Jim with your stepping down thank you for your service, best of luck on your next challenge, Ron do you have any sense of timing for new CFO?

[Ron Kochman:]

No, going to say that we’re focused on hiring a qualified, successor to Jim it will be tough for a number of reasons given the uncertainty created by the potential proxy process, the recruitment process may take some time. Therefore, we will as necessary supplement of finance team with interim support, as we search for a Jim successor. Jim will be with us through the first quarter filing.

[Operator:]

This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.