VOLT - NASDAQ

Greetings, and welcome to the Volt Information Sciences, Inc. Fourth Quarter 2018 Earnings Conference 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. Thank you. You may begin.

Good afternoon, and thank you for joining us today for Volt Information Sciences fiscal 2018 fourth quarter and full-year 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. By now, everyone should have access to the news release, which was issued after the market closed today. If you have not received the release, it's available on Form 8-K with the SEC and in the Investors section of Volt's website at www.volt.com. Before beginning 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 a variety of factors. We refer you to Volt Information Sciences' recent filings with the SEC for a 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 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?

Thank you, Lasse. Good afternoon, and thank you for joining us today for our fiscal 2018 fourth quarter earnings conference call. I'll begin today's call with an overview of our fourth quarter financial performance, along with some of the operational highlights that have me pleased with the progress we are making. Paul Tomkins, our Chief Financial Officer, will then discuss additional details about our fourth quarter financial results, including an update on our liquidity position. I will keep my remarks fairly brief today, as many of you heard from me just four weeks ago on a call we hosted to provide investors with a better understanding of the significant changes taking place at Volt. And you had the opportunity to hear directly from some of the experienced industry executives now leading the business. If you have not yet had the chance to listen, I would highly encourage you to visit our Investor Relations website where a link to the replay is posted. Turning to our fourth quarter results, overall, we enjoyed an extremely productive fourth quarter highlighted by improvement in same-store revenue, gross margin expansion, and careful expense management, all of which collectively resulted in significant growth in adjusted net income from continuing operations. At the top line, we are beginning to realize the benefits from changes to our North American Staffing segment's organizational structure designed to strengthen its service delivery, coupled with a much more robust sales engine. In addition, our focus on driving retail growth in commercial and professional job categories, our renewed emphasis on direct hire business, as well as the favorable California FUTA credit significantly improved gross margins on a same-store basis year-over-year. We also remain keenly focused on achieving operational efficiencies and cost containment initiatives. These efforts contributed to a sharp reduction in selling, administrative, and other operating costs on a same-store basis compared with a year ago. Without a doubt, we have made tremendous strides and the performance of our business has dramatically improved from just two quarters ago. This is directly attributable to the world-class group of staffing industry experts that make up the Volt leadership team and the tireless efforts of all of our dedicated employees who are executing best-in-class operational strategies designed to restore the luster of Volt. Let me take a moment to demonstrate the progress we are making as evidenced by our fourth quarter financial results. Looking at our revenue performance, we have achieved solid improvement over the last two quarters. After 10.5% and 7.6% year-over-year same-store declines in Q1 and Q2 respectively, during the current leadership team’s first full quarter at the helm, we improved to a 6.6% decline year-over-year in Q3. And during this past Q4, again, after just two full quarters of executing our strategic plan, we narrowed the gap even further to a 2.8% year-over-year decline on a same-store basis. Key to our improving top line is the success we are seeing in our North American Staffing business that generates approximately 85% of Volt's consolidated revenue. In fact, during the month of October, which was the last month of the fourth quarter, we generated, year-over-year revenue growth in our North American Staffing segment for the first time in many years. The momentum has continued into November and December and we are anticipating this segment would generate positive year-over-year revenue growth in the first quarter of fiscal 2019. Here we have clearly benefited from the foundational elements of our strategic roadmap that includes, first, an organizational restructuring that has better aligned Volt for the competitive advantage to focus on areas where we are better positioned to win, including both retail and middle market customers. Second, a significantly enhanced sales organization that is operating in multiple and distinct sales channels. And third, we have initiated a high-performance culture with far greater accountability at every level throughout the organization. In addition to the stronger revenue performance, we have multiple operational initiatives that we are executing to improve profitability. This includes teams dedicated to sales and delivery to retail clients, which tends to be higher margin business with a higher degree of pricing flexibility. During the fourth quarter, revenues associated with new retail clients increased by 29% year-over-year. The other opportunity we have with retail clients is direct hire fees, which positively impact gross margins. Our efforts here continue to pay off as we experienced a nearly 30% year-over-year increase in direct hire fees in the fourth quarter. And while we also did benefit from a California FUTA or Federal Unemployment Tax Act credit during the quarter, our efforts to drive more profitable business helped expand same-store gross margins to 16.6%, a 160-basis point increase year-over-year. We also remain highly focused on expense management initiatives designed to align our corporate costs and overall SG&A to best-in-class industry standards. Over the past six months, we have been able to reduce costs through improved efficiencies, automating manual processes, elimination of non-standard processes, and removing redundancies in various roles and departments. During the fourth quarter, we were successful in reducing selling, administrative and other operating costs by $8.9 million or 17.7% to $41.3 million on a year-over-year basis. Excluding businesses sold or exited, selling, administrative and other operating costs for the fourth quarter decreased 13.2% from the prior-year period. During the fourth quarter, we announced additional restructuring activities intended to optimize both growth initiatives and overall business performance. This restructuring included a combination of lease terminations and other changes, primarily related to redundancy in roles and operational efficiencies. In total, we anticipate these actions will result in annualized net savings of approximately $7.5 million beginning in fiscal year 2019. These efforts are consistent with an overarching commitment to improving both cost structure and aligning our financial resources with the priorities of our business. Although difficult, these actions are an essential part of our transition to ultimately become a sustainably profitable enterprise. We expect to reinvest a portion of these savings into expanding our sales and recruiting engine, enhancing our recruiting tools and launching new marketing initiatives. We will also continue to identify additional opportunities to improve our cost structure and enhance operational efficiencies going-forward. On the bottom line, we reported adjusted income from continuing operations in the fourth quarter of $1.5 million, compared to an adjusted loss of $7 million in the fourth quarter last year. In addition, fourth quarter adjusted EBITDA was $4.7 million, up significantly from approximately $100,000 last year. While our profitability is far from where it needs to be longer-term, I am encouraged by these clear signs of progress. With that, I would now like to turn the call over to Paul Tomkins who will review Volt's fourth quarter financial results. Paul?

Thanks, Linda. Good afternoon. Today, I will provide additional details on our fourth quarter financial results, as well as provide a status of our liquidity position. We were pleased with our results in the quarter, which continued to demonstrate progress in improving our cost structure and year-over-year revenue declines as compared with the last several quarters. Let's now turn to the fourth quarter results. Our revenue in the fourth quarter of 2018 was $264.8 million. When compared with the prior-year quarter, total company reported revenues declined $23.7 million or 8.2% on a year-over-year basis. The revenue decline was driven primarily by the sale of the game testing business at the end of fiscal 2017, representing $15 million, as well as decreases in the North American Staffing segment of $3.7 million and the International Staffing segment of $2.9 million. On a same-store basis, excluding businesses sold and the impact of foreign exchange, total company revenue in the fourth quarter declined $7.7 million or 2.8% on a year-over-year basis. Revenue in our North American Staffing segment, which provides a broad spectrum of contingent staffing, direct placement, and other employment services was $220.5 million in the fourth quarter, down 1.6% on a year-over-year basis. This represents a significant improvement from the third quarter in which the North American Staffing revenue declined 6% on a year-over-year basis. As Linda indicated, as a result of bringing in top industry talent, the strong existing team, realigning the organization and focusing on retail customers and direct hire, we are seeing a definitive Improvement in both revenue and margin within the North American Staffing business. Total company gross margin in the fourth quarter of 2018 was 16.6%, an improvement of 160 basis points year-over-year, adjusted for businesses sold. The margin improvement was driven by a favorable California FUTA adjustment, lower worker compensation claims, and a better mix of higher margin business. As Linda indicated, we continue to benefit from our efforts to reduce costs throughout the business with selling, administrative and other operating costs improving 13.2% year-over-year, excluding businesses sold. Much of our SG&A improvement year-over-year is directly attributable to our ongoing cost reduction efforts in all areas of the business, including lower labor and consulting costs and additional productivity gains. We remain focused on identifying additional cost reduction opportunities in 2019. As a result of these actions taken thus far, in fiscal year 2019, we will have eliminated at least $35 million or 17% of annual SG&A costs on a comparable basis with fiscal year 2015, excluding businesses sold and the impact of the 53rd week in fiscal 2019. Turning to our total company profitability for the quarter, adjusted EBITDA was $4.7 million in the fourth quarter compared to $0.1 million in the year-ago period. Adjusted EBITDA excludes the impact of special items, including restructuring and impairment charges. The significant year-over-year improvement reflects the early success we are seeing across the board as we execute our strategic plan, including revenue growth in our North American Staffing segment, margin improvement and expense reductions. Loss from continuing operations was $2.9 million in the fourth quarter, compared to a positive $39.8 million in the fourth quarter last year. The year-over-year decrease was primarily due to the $48 million gain on the sale of the quality assurance business during the fourth quarter of 2017. On an adjusted basis, we demonstrated significant progress during the quarter reporting positive income from continuing operations of $1.5 million during the fourth quarter of 2018. This was up from an adjusted net loss from continuing operations of $7 million in the prior-year period. Now, let's move on to our segment operating results. Operating income in our North American Staffing segment was $8.2 million in the fourth quarter, up nearly 50% when compared with operating income of $5.5 million a year ago. On a sequential quarter basis, our operating income improved by $5.2 million as a result of both improved gross margins and continued expense reductions. While we feel very good about our progress during the quarter, there is still much work to be done, as we look to continue improving these results. Operating income in our International Staffing segment was $1 million, up slightly compared to the year-ago period. Belgium continues to be a strong contributor to our international business on both the top and the bottom line, including strength in its direct hire business. As part of our efforts to be more transparent with our financial disclosures, this quarter and going forward, we will also be reporting on our North American MSP business, which was previously included in corporate and other. North American MSP consists of managing the procurement and onboarding of contingent workers, as well as payroll service solutions and recruitment process outsourcing. Operating income in our MSP business in the fourth quarter was $0.8 million, a 4.3% increase, compared to the fourth quarter in fiscal 2017, primarily due to improved gross margins. With respect to our liquidity position, at the end of the quarter, we had a total of $56 million in global liquidity, up from $52.7 million at the end of the prior quarter. Our global liquidity at the end of the fourth quarter was comprised of $17.7 million in cash in banks and $38.3 million in borrowing availability. Although we continue to believe, our current levels of liquidity remain sufficient to operate our business, we continue to work hard with our lender to optimize our available liquidity levels. Subsequent to the quarter, effective January 4, 2019, we amended our securitization program with D

Thank you, Paul. What is clear from the results we achieved in the fourth quarter is that we have turned the revenue curve in North American Staffing and we are making progress in many enterprise-wide financial metrics. We realized positive revenue growth in the last month of the fourth quarter in our largest business segment. We are realizing the results of our new organizational structure, our robust sales engine and the far greater accountability that has been instilled at every level of the organization. We believe in the sustainability of our plan and continue to see ongoing improvement early in Q1 2019. As mentioned earlier, we expect to achieve positive year-over-year revenue growth in this segment for Q1. Across the enterprise, gross margins expanded year-over-year. Equally as important, our gross margin dollars, also grew year-over-year. We continued to carefully manage expenses company-wide and we achieved positive adjusted EBITDA and positive income from continuing operations for the quarter. I am extremely proud of what our team has accomplished in a very short period of time. Momentum continues to build at Volt. Our results this past quarter are strong evidence that we're on the right track and I am in awe of the team's dedication, persistence and hard work. I look forward to continued execution of our strategy, enhancing our financial and operational performance, and driving shareholder value in the near and long-term as we move forward. Thank you for your time and attention today. Now, I would like to open up the call for questions. Operator?

Great, thank you. [Operator Instructions] Our first question is from Richard Whitman from Benchmark Capital. Please go ahead.

Yes, Paul, is my arithmetic correct that the net-net of the company is $2.42 a share, that's current liabilities – current assets minus current liabilities minus long-term debt equals $2.42 a share?

Yes, I will take a closer look at that, Richard, but I believe so. Yes.

Okay, thank you.

Sure.

Our next question here is from Ross Taylor from JRS. Please go ahead.

First of all, great numbers. It's nice to actually see what a professional running the company can do for those of us who suffered through a few years of, shall we say, less than professional operational management. Are the – you've talked about the idea that the first quarter is going to show continued – you expect it to show continued revenue growth, how is that going to help or drive improved margins and what kind of margin level should we be benchmarking you at as this revenue growth continues?

Yes. Hi Ross. So, a couple of things. I'll start with the revenue growth. We are expecting a positive revenue growth in our North American Staffing segment. So, that we are confident in. When we look at Q1, Q1 is a little bit of a volatile quarter for gross margin, given that our Q1 includes January where all taxes are reset. So, as has been in the past, we typically see a lower gross margin in Q1, coming off of a Q4, due simply and largely to that impact. I'll answer the second question in terms of – from a margin level, one of the areas in which we are being challenged this quarter is International. International, as you may be aware, is largely professional business, largely higher margin business. The majority of our International business is in the UK, we've got Brexit and sort of the instability of that economy right now which is causing not only Volt, but all of our competitors to slow. So that is certainly impacting us and we anticipate that that will to impact us for Q1. What I can confidently tell you is that we are doing everything that we can within our operational initiatives and within our strategic plan to drive gross margins and minimize that impact. We have – we are laser focused on direct hire, that is key for us. We are laser focused on our pricing discipline, ensuring that we are pricing appropriately on every single deal regardless of size and we are laser focused on ensuring that we get the price increases that we've gone out to market for, which will help us to recoup some of our increased recruiting costs.

Stepping away from what's going on with Brexit and Europe, can you - the real issue with this company has been the failure in North America. Can you talk about looking at North America forgetting the idea that Brexit is going to drive – might have margin impact in the first quarter, what do you see going on in North America as we roll forward?

Yes. So, in North America, again as I mentioned, I expect that Q1, we will see positive year-on-year revenue growth, which again we haven't seen for a full quarter in many, many years. We will see the impact to our gross margin from the reset of the taxes in January. So that will occur. However, we are seeing growth both in our contract business, as well as our underlying retail business. So that will help to offset, where in the past we didn't necessarily have that offset.

Okay. And then I'd just like to make one comment. I know I speak to a number of – fair number of holders. There's a great deal of frustration, anger, disappointment that when shareholders in an uncontested election with an unorganized, no organization, no opposition voted against the former Chairman resoundingly. He got substantially less than the majority of the votes cast and yet he still sits on the Board and I know every shareholder I talk to – and I can't say I talk to them all, but I know this is a sore point and we would very much love to see the Board take steps to implement the will of the shareholders that was so clearly voiced in that vote.

So, thank you for that. I believe that the Board has certainly heard the voice of the shareholders and are certainly going to respond accordingly. But we have heard you. We have heard you loud and clear. What I certainly don't want to do is have that distract from the great results that we've just had and the results of the team. So, I will certainly be sure that the Board takes that under consideration.

And the last thing I want to say, it's great, you now actually have a quarter where in two days insiders can buy stock. It's I think the first time in years that you haven't had a process or something going on. And I think you've done an excellent job. I mean the operational turnaround in a short period of time is really pretty staggering, staggering in the good sense. So, congratulations, and we look forward to seeing insiders finally free to actually commit capital to the stock too. Thank you.

Thank you, Ross.

[Operator Instructions] If there are no further questions, I'd like to turn the floor back to management for any closing comments.

Thank you for all of your time and attention. Appreciate all of your support to all of our employees on the phone. Thank you very much for all of your hard work and dedication. Let's keep up the positive momentum, and we look forward to speaking to you again in March.