VOLT - NASDAQ

Greetings, and welcome to the Volt Information Sciences' First 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. It is now my pleasure to introduce your host, Lasse Glassen, Investor Relations for Volt Information Sciences. Thank you, sir. You may begin.

Good afternoon, and thank you for joining us today for Volt Information Sciences' Fiscal 2019 First 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 imply 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 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 2019 first quarter earnings conference call. I'll begin today's call with an overview of our first quarter financial and operational performance, as well as our key strategic priorities for fiscal 2019. Paul Tomkins, our Chief Financial Officer, will then provide additional details about our first quarter financial results, including an update on our liquidity position. We are off to a good, reassuring start in fiscal 2019 as solid execution drove improved performance in virtually every key financial and operational metric. I am pleased to report that for the first time in 26 quarters, we generated total company year-over-year growth in net sales. I attribute this growth largely to actions we initiated last year within our North American Staffing segment, all designed to improve our sales engine and strengthen service delivery. On a same-store basis which excludes a business exited and the impact of foreign currency fluctuations, total company revenues expanded by nearly 1%. This marks the first quarter of year-over-year growth at Volt since fiscal 2012. Considering that just one-year ago, we recorded a 10.5% year-over-year revenue decline, we are turning Volt to a growth trajectory in Q1 after just three full quarters under the current leadership teams tenure is a meaningful accomplishment. In addition, our emphasis on driving retail growth in our commercial and professional job categories, pricing discipline on new business and success in reducing workers' compensation expenses, improved Volt’s gross margins on a year-over-year basis. We also continue to see benefits from our cost containment initiatives and other efforts to achieve operational efficiencies across the enterprise. Paul will discuss these efforts in more detail, which in total resulted in a sharp year-over-year reduction in selling, administrative and other operating costs. Our success in these key metrics during the first quarter collectively contributed to the year-over-year improvement in Volt’s operating results and adjusted EBITDA. We have accomplished a lot in a very short period of time and our success would not be possible without the commitment and hard work of Volt’s employees around the globe. I applaud their efforts and I am truly proud and privileged to have the opportunity to work with such a dedicated and passionate team. Key to our improving topline is the ongoing success we are seeing in our North American Staffing business that generates approximately 85% of Volt’s consolidated revenue. During the first quarter, revenue from our North American Staffing segment increased 2.7% year-over-year. This topline growth is generally in line or better than revenue growth rates recently reported by several of our staffing industry peers. Within North American Staffing, we are continuing to benefit from the foundational initiative of our strategic roadmap that we began to implement in mid fiscal 2018. Key elements included an organizational restructuring that is better aligned Volt with a competitive advantage to focus on areas where we are better positioned to win. That includes retail and mid-market customers. We have also built a much more robust sales organization and we are now operating in multiple distinct sales channels. This has helped create a deeper and wider sales funnel, bringing more new business opportunities across the enterprise. As we continue to gain momentum in both retail sales and Strategic Solution sales, we are actively sourcing and hiring top sales talent across the country. And finally, we have instilled a high-performance culture at Volt with far greater accountability at every level throughout the organization. The combination of these initiatives has had a very positive impact across the North American Staffing segment. As a result of realignment and focus on areas where we are better positioned to win, we experienced a 34% increase in revenues associated with new retail clients compared to the prior year. Importantly, gross margin for this new retail business was approximately 500 basis points better than our overall company average. While we are pleased with the growth in this segment year-over-year, we are well aware that we still have improvements to make in order to achieve our ambitious goals for retail growth. Further, improvements in our organizational structure, stronger order fulfillment, and overall better service delivery generated strong revenue growth from existing large enterprise clients. As we look ahead in 2019 at our North American Staffing segment, aside from the foundational aspects of the strategic roadmap that I just discussed, many of our strategic priorities are focused on technology advancement to help improve our ability to connect people and work. Traditional recruiting efforts are not working like they once were. We must keep up with the changing technology trends, or we risk falling behind our competitors. During our earnings call last September, as part of our business optimization strategic priority, I had shared our focus on fully leveraging our enterprise-wide front office system. Since that time, we have been actively integrating all intended tools, processes and reporting with the objective of increasing field productivity. Let me provide an update on our progress. The team has been hard at work in two key areas. First, integration and implementation of upgrade designed to improve efficiency. These include integrating all job board into a single tool in our front office system, consolidating all job posting, and finally tracking ROI on each job board. We have also piloted an external tool in multiple large ramp during the first quarter, which easily integrated into our front office system and allowed for live text technology to reach potential candidates more quickly. Given the success we are experiencing with this tool, it is now being launched to a wider audience by the end of Q2. Second, the teams have focused on improving the quality of technology tools designed to enhance sales efforts, candidate experience, candidate attraction, and ultimately, improved field productivity. For example, we have integrated some of the most robust job posting tools to support the field in identifying more candidates to fill our job openings. This has now been expanded nationally. We have also fully integrated a tool that monitors customer behavior, satisfaction, and activity based on our front office system actions and outcomes. This will allow us to see common patterns and trends in customer buying behavior and satisfaction as well as provide leading indicators for potential risk of loss. We are also working diligently on efforts to improve our mobile technology capabilities. Enhancement to our mobile capabilities will allow us to remain competitive in the ever changing on-demand economy. As a result of these business optimization upgrades, we have realized an increase in overall field productivity, which we define as gross margin per FTE, or full-time equivalent. In the first quarter, productivity in our North American Staffing segment increased 13% year-over-year. Now let's turn to our strategic priorities for our North American MSP segment, which comprises our Volt Consulting Group or VCG and consist of managing the procurement and onboarding of contingent workers as well as payroll service solutions and recruitment process outsourcing solutions. During the first quarter, we finalized our new operating structure for the organization. This change enables VCG to better focus on existing client expansion, operational excellence, and new client sales. By creating clear roles and responsibilities, this new structure will allow us to measure and better hold employees accountable to winning new clients and expanding existing programs. We have strengthened our ability to compete. Given our size and unique operating model, which includes a flat hierarchical organization, we can be more flexible and agile than many of our competitors. Simply put, we can make decisions and move faster than our competitors to implement programs. The technology improvements and integrations I mentioned will have significant benefit for our managed service and outsourcing space. MSPs need to provide quality talent quickly, while showing value and cost savings for our clients. Much of our progress in technology will enable us to schedule, screen and engage talent throughout the process, increasing our ability to impact the user experience. Finally, as is the case in North American Staffing segment, we are adding additional talent to our VCG sales engine. This is a highly competitive space for finding good talent that can sell managed solution. Finding sales talent is our key priority to help us continue to win new client logos. Quality professionals in the industry are sensing the momentum underway at Volt and increasingly want to be part of our team. And finally turning to our International Staffing segment. Priorities in the first quarter focused on expansion in Belgium and Singapore and taking the necessary steps to return the UK business to growth. Planning was completed to open in the Flemish speaking region in Belgium and onboard new hires in Singapore. In the UK, a restructure of teams facilitated cost savings while also allowing tighter focus on sales activities. Priorities for the second quarter are the actual launch of the second office in Belgium, managing to the macro headwinds of Brexit in the UK, and keeping a very close eye on cost. With that, I would now like to turn the call over to Paul Tomkins, who will review Volt’s first quarter financial results. Paul?

Thank you, Linda, and good afternoon, everyone. I will now discuss the first quarter financial performance in more detail. Our topline performance in the first quarter of 2019 resulted in the following significant milestones. First, our total company revenues of $253.4 million grew slightly on a year-over-year basis for the first time in 6.5 years. And second, same-store revenues which exclude a business exited and the impact of foreign exchange improved $1.8 million or nearly 1% on a year-over-year basis. Our revenue performance was driven by our North American Staffing segment. North American Staffing revenues were $211.8 million in the first quarter, up 2.7% on a year-over-year basis. The growth in North American Staffing more than offset year-over-year revenue declines at other business segments. Revenues in our International segment were $26.3 million. International revenues declined to 11.2% 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 5.8% year-over-year, primarily due to continued lower demand in the United Kingdom. Our International segment has the capacity to deliver improved results. We have and we will continue to take meaningful steps to improve the business. Revenues in our North American MSP segment were $8.2 million, a decline of 3.1% year-over-year due to the loss of several programs early last year. This revenue performance represents improvement over the past several quarters and includes a larger mix of managed services revenue at higher margins. As you may recall, our call center business within our Corporate and Other segments supports one large customer that generates multiple revenue streams for Volt. As a result of lower demand, on a year-over-year basis, specific to our call center business, revenues are lower by approximately 24%. Along with the consolidated revenue growth, ongoing initiatives aimed at improving gross margins are continuing to bear fruit. Total company gross margin was 14.9%, an improvement of 70 basis points year-over-year, and marks the second consecutive quarter where gross margins improved. Contributing to the gross margin expansion was the growth in retail revenue, which tends to be higher margin business as well as lower workers' compensation expenses. These improvements to gross margins were partially offset by increased volume in many of our higher volume low margin top 20 customers in our North American Staffing segment. This increased volume represents a higher percentage of our revenue in the first quarter, which impacted our overall gross margin. The good news is that we realized record order volume in several of our top 20 clients during the first quarter and we successfully delivered in each instance. We are also continuing to benefit from our efforts to reduce costs throughout the business with selling, administrative and other operating costs improving $7.1 million or 15.2% year-over-year. We remain highly focused on expense reduction activities designed to drive our corporate costs and overall SG&A toward the industry standards. Much of our SG&A improvement is attributed to driving efficiencies in our processes, reorganizing and redistributing work across the organization as well as making cost effective leasing decisions. As a result, SG&A as a percent of revenue improved to 15.7% compared with 18.5% a year-ago. While our latest restructuring activity at the end of fiscal 2018 is expected to generate annual SG&A savings by approximately $7.5 million, we will reinvest a portion of these savings into expanding our sales and recruiting engine, enhancing our recruiting tools and launching new marketing initiatives. Turning to our total company profitability for the quarter. Adjusted EBITDA was negative $1.1 million in the first quarter compared to negative $9.1 million in a year-ago period. This represents a notable improvement. Net loss was $3.2 million in the first quarter of fiscal 2019, compared to a loss of $10.7 million in the first quarter of fiscal 2018. We experienced improved operating income from our North American Staffing, International Staffing and North American MSP segments as follows. Operating income in our North American Staffing segment was $3.9 million in the first quarter, an improvement of $4.5 million compared to an operating loss of $0.6 million in the year ago period. As we indicated, we attribute the year-over-year improvement to the overall sales and delivery strategies, driving revenue growth and improved gross margins as well as reduced operating expenses. Operating income in our International Staffing segment was $0.3 million, up $0.4 million compared to a year ago period. Operating income for our MSP business in the first quarter was $1 million, an increase of $0.7 million compared with the first quarter of fiscal 2018, primarily due to improved gross margins driven by a higher mix of managed services. Shifting to our liquidity position. At the end of the quarter, we had a total of $55 million in global liquidity in line with the prior quarter. Our global liquidity at the end of the first quarter was comprised of approximately $24 million in cash in banks and $31 million in borrowing availability. With that, I'd like to turn the call back to Linda. Linda?

Thank you, Paul. What is clear from the results we achieved in the first quarter is that we are making solid progress across the enterprise. We have achieved year-over-year revenue growth for the first time in 26 quarters. Gross margins expanded year-over-year. SG&A costs are lower and we continue to carefully manage expenses, and our profitability metrics are sharply higher. As many of you know, last quarter was the first time Volt provided guidance, even directional guidance. We are pleased we were able to exceed a pattern we are striving to continue. For the second quarter of fiscal 2019, we currently expect total Volt consolidated revenue to come in roughly 1% lower than prior year, driven largely by declines in the International Staffing segment declines in our call center business within our Corporate and Other segments and uplift in the North American MSP segment performance and modest single-digit decline in our North American Staffing segment. In the current quarter, we are realizing headwinds in our North American Staffing segment related to unexpected headcount reductions from three of our large customers. It is important to note, these are companies in different industries with no common threats. I can assure you, we are working diligently to at least be flat in our North American Staffing segment. It's just too early to be more specific at this point in time. Before we open up the call for questions, I'd like to briefly comment on a few more items. First, the recent buying activity by our Board and Management team. As many of you are aware, both insiders were precluded from purchasing stock for an extended period of time. We took advantage of the last quarterly open period and during that time, all of Volt’s Section 16 officers, nearly all directors and many employees throughout the enterprise purchased shares of Volt’s stock for their personal accounts. I genuinely appreciate the support of the Board and the support from all colleagues who participated. This demonstrates our continued commitment to the outlook of our business performance as well as our desire to better align our shareholders' interests with those of Volt’s Management team and Board. Second, as indicated in our recently filed proxy, two of our directors will not be standing for reelection at the next Annual Meeting. On behalf of Management and the Board, I would like to sincerely thank Dana Messina and Laurie Siegel for their years of service. Dana previously served as Chairman of the Board and Laurie chaired the HRCC committee. Celia Brown has been nominated to the Board and given her strong background and skills we are looking forward to her contribution. Now, I would like to open up the call for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Josh Vogel with Sidoti & Company. Please proceed with your question.

Thank you. Good afternoon.

Hi, Josh.

Hi, Josh.

Hi. I guess my first question – it's obviously nice to see the improvements across all business lines following last year's realignment and growth initiatives. My first question is can you quantify what percent of your business today is coming from retail and mid-market clients?

Yes. Retail in total is…

Retail in total is 11% today. We obviously – when I talk about ambitious goals, our goal is significantly higher than that. Mid-market makes up about another 30% to 35%, Josh, and the rest of it then is our large customers.

Okay. And the average gross margin in the retail business is 500 basis points higher than your consolidated margins. Is that something you think will narrow as we progress throughout the year?

The intent is that that continues to grow and improve. So we're pleased that our efforts are – a lot of the things that we did. So we instilled some pricing discipline throughout the North American Staffing segment organization. We are monitoring that very closely. We are tracking that information. We've got strong pricing discipline in place as well for our sales directors and our growth expansion directors. So we have those in place where we're pleased to see that our efforts are paying off and we're beginning to see that growth in the gross margin of the retail business. There's still capacity for it to improve. We still need improvement and we still need more of it.

Great. That's good to hear. That actually leads well into my next question. Around the pricing environment, I guess first, can you discuss the dialogue you're having with these – with your larger price-competitive customers?

Yes. So there's a number of things. So we did go out for price increases this year. That is an effort that is still underway. Many of the customers have agreed to that. Many others were already within their path for budgeting period. So what we've negotiated with them are other ways that help us either improve costs and/or margin, for example, reduce payment term. So we are working through those negotiations of all of our large customers. We have those being owned by very specific people within the organization and those conversations will continue through the end of March.

Okay, great. I missed some of your commentary when you were discussing guidance going through each segment. Can you just, please restate that?

Yes. So we are expecting some negative impact from our international group, right?

Okay.

We're continuing to see declines in the international group. We are also realizing disproportionate declines in our call center business under our Corporate and Other segment. We are seeing significantly improved results on the VCGs or MSP business. So despite the modest decline of 3.1% in Q1 that came from – down from 32%, three quarters ago, and the outlook for them looks quite positive. And then we're going to see North American Staffing come in with a very modest decline for Q2 for the reasons that I mentioned.

Right. Okay. So those headcount reductions you mentioned in three large customers, all separate businesses. How is the dialogue with those clients? Just do you think they're short-term one quarter or two quarter event? Do you see them picking up their hiring as we get out a couple of months from now?

Yes. So this is really important point as we look into Q2. So again, these were unexpected reductions, these were – two of the three were clients that had hit record high headcount numbers in Q1. This is about them normalizing their business to lower headcount numbers. It was unexpected. It was not something that we anticipated. It is roughly impacting, overall, these three customers for the quarter, will roughly impact North American Staffing segment to the tune of about $8 million to $10 million. The good news is, is that, we have made up about 88% to 90%. So that through all of the sales efforts that we've been doing, all of the sales restructuring that we've done, and we're seeing uplift from our retail, from our branch network, from our BDM, from our sales directors, our growth and expansion directors. So everybody is contributing to that. We are pushing hard – very hard to make up as much of the full amount as we can, and we're not going to give up. We've got plans around very specific levers that we're going to push or pull. So I think it's important to note that this is not more of the same of what has happened in the past. In the past, we didn't have that sales engine and if we were down $9.2 million or $8 million to $10 million, $9 million, whatever the number is, we didn't have the sales engines to make that up. We do today, so it will result in a modest decline, and that pains me to even say, so we're pushing hard to make that a better result.

Okay. Great. And one more if I could sneak in one more, if I may. Obviously, you've done a great job with the cost-cutting initiatives, $7.5 million in annual savings. I know that a lot of that – the bulk of it will be reinvested back into the business. I was just curious as we look out through out the balance of fiscal 2019, have you found any more opportunities to call out cost? How should we expect to think about that going forward?

Yes. Go ahead, Paul.

Yes. We have other opportunities that we're – number one, we're always looking at opportunities. We have more efficiencies that we're building into our processes. And that will result in additional SG&A reductions as we move forward. That are not included in that $7.5 million that came from the restructuring activity last year.

Yes. And what I would say to piggyback on that, Josh, is that we have identified, as we continue to integrate tools into our front office system, as we've begun to drive productivity, as we've been continuing to look at structuring the organization differently to gain efficiencies. We are identifying different ways that we can structure the organization going forward, and that will allow for ongoing headcount reductions, while improving productivity at the same time.

Okay. That's very helpful. Thank you for taking all my questions.

Thanks, Josh.

Thank you, Josh.

Thank you. Our next question is from the line of Ross Taylor with ARS. Please proceed with your question.

Thank you. First, congratulations on the strong quarter and in fact more congratulations on really a hard-to-imagine turnaround. You and your team have only been there for a short period of time and quite honestly it’s a radical change and it's really exciting to hear both the tone and to see the execution. So I think all shareholders should be very pleased that the Board walked away from a deal late last year that probably wouldn't have paid us a lot more than we're currently trading at. So thank you very much for all you guys are doing.

Thank you.

And second is couple of questions. One, issue of EBITDA, what's it going to take to get EBITDA to slide into the positive side of things? Then the second question I'd like to have you address is how much of the foreign problem or the international problem that’s really Brexit related do you think?

Okay. Ross, let me take the EBITDA question. So number one, we’re fairly close this quarter. As we move through the year, we will be ramping EBITDA and we will actually finish in a positive position for the year. We continue to work on both the topline margins for the variety of reasons that we've outlined as well as SG&A. So really all points driving down to the EBITDA, but we anticipate getting there by the end of this year.

And then I’ll say – sorry Ross.

No, I just want to say that's fantastic. I mean, having been a long-term investor, the hope of actually having positive EBITDA was something that was fading from me.

So I'll take the Brexit question. We're certainly experiencing headwinds from the uncertainty. I don't know that I could put a percentage necessarily to it or way path for you. Other than to recognize that our UK teams are definitely challenged by Brexit in multiple different ways. What I will say is that, there are things that we can control despite Brexit. So Brexit hasn't happened yet. We don't know yet what is exactly going to happen. We have the opportunity to aggressively pursue segments of the business that will not be as impacted by Brexit as others. We have the opportunity to aggressively look at new segments that may not be impacted by Brexit as aggressively as others. So the team does have the capacity to perform better. We're working closely with them. I know they are working incredibly hard to make that happen. They've had several wins in the past month or so, particularly in the UK, which is quite positive. So I know Scott and his team in the UK are trying to aggressively focus on what we can control rather than what we can't.

Okay. And then one last question I have is your sales effort has shown tremendous traction in a very short period of time. You've complimented everyone's effort in doing that. But when you look at it yourself, how much more room – how much more upsides do you have given how really limited the time that the new procedures and new processes have been in place?

We have tremendous upside potential. So if you think about, we are seeing progress in our retail growth as I mentioned. So we've been at that a little bit longer. We've been doing that since July of last year. So those efforts are paying off. We're doing a better job of hiring the sales talent that better aligns with the organization, is a better cultural fit and has a higher likelihood to succeed, which is all very positive. The Strategic Solutions group team really didn't get started until November. So that has been them building. So they've been taking time to build their pipeline. They've had a couple of wins, but we are now just starting to see really the influx of wins. We just had one yesterday. We are super excited about. There has been six or seven wins so far. We've got quite a significant pipeline built. There are many that are close to close. We're looking at several that have transitioned business, which means we pick up immediate revenue. So that is incredibly positive. I already talked about the improvement opportunities that we have and a significant opportunities we have on the retail side. When we look at the VCG side, they have significant uplift as well. That team has been very successful in wins, retaining business that we could have lost, and identifying new opportunities. So we definitely have the sales engines going, and we should continue to see the windfalls of those throughout the remainder of the year and especially into 2020.

I would just add one thing, Ross, on that too. On the VCG side, we have more opportunity to feed more business in from VWS because right now, we're at a percentage where we feel, we definitely can improve upon it, and as VCG grows, we're going to grow our business from the VWS into those MSPs.

Okay. Well I have to say you guys have done an amazing job turning it around. It looks like we're just on the launching pad for some really exciting things. So keep up the good work, and I also have to say it's really nice to have a management team that's confident enough to talk to its shareholders over an open mic.

Thank you, Ross.

Thanks a lot.

Appreciate your kind words.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. So I would like to pass the floor back over to Linda Perneau for any additional concluding comments.

Thank you. Thank you for all of your support to everybody on the call. Thank you for joining today's call. I'd like to mention that later this month we will be participating in the ROTH Investor Conference in Orange County on March 18. We are also presenting at the Sidoti Spring Investor Conference in New York City on March 28. We hope to see many of you there. Otherwise, we look forward to speaking with you again when we report our fiscal 2019 second quarter results in early June. Have a great day.