VOLT - NASDAQ

Greetings. Welcome to Volt Information Sciences' First Quarter 2020 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.I'll now turn the conference over to Joe Noyons, Investor Relations. Mr. Noyons, you may begin.

Thank you, Rob, and good afternoon, everyone. Thank you for joining us today for Volt Information Sciences' first quarter fiscal 2020 earnings conference call. On the call today are Linda Perneau, President and Chief Executive Officer; and Herb Mueller, Senior Vice President and Chief Financial Officer.After the market closed this afternoon, the company issued a press release announcing its results for the first quarter of fiscal year 2020. The release is available on the company's website at volt.com, as well as the EDGAR SEC website filed as a Form 8-K. Before beginning today's prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are 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, management will reference certain non-GAAP financial measures, which we believe 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, I would like to turn the call over to Volt's President and CEO, Linda Perneau. Linda?

Thank you, Joe. And welcome everyone to our first quarter fiscal 2020 earnings call.In the first quarter adjusted revenue came in at the top end of our expectations, as we continue to make progress on our strategic transformation, secured multiple new wins and continue to realize reduced SG&A from our efforts made in 2019. As we stated on our fourth quarter earnings call, we expect that our progress would not be linear, and that we would experience some challenging quarters.Our first quarter revenue performance was as expected. We continue to see our progress overshadowed in our results as compared to first quarter 2019 when we had unprecedented demand from some of our larger clients. Revenue for the current quarter was also impacted by a shift of certain clients from our North American Staffing segment to our MSP segment.I will go into more detail on these items later, but first, I would like to turn the call over to Herb Mueller, our CFO, who will review our financial details for the quarter and then come back to talk about our strategies and outlook. Herb?

Thank you, Linda, and good afternoon everyone.Revenue for the first quarter of fiscal 2020 was $217.8 million. Adjusted revenue, which excludes the effects of businesses exited, the impact of clients shifting to a managed service delivery model and foreign currency translations decreased 10.4% year-over-year, which was at the top end of the guidance provided on our fourth quarter call.Looking at our business segment results. North American Staffing represented 84% of overall revenue during the first quarter. Revenue from this segment was $182.4 million, adjusted revenue decreased 12.7%. The decrease is primarily attributable to continued workforce adjustments from certain larger clients specifically related to changes in their businesses and the slower than anticipated post holiday ramp.In addition clients that were previously within the North American Staffing segment transferred to our North American MSP segment. The shift resulted in a net decrease of $2.6 million of revenue. Our international staffing business, which represented 12% of total sales in the first quarter, was relatively unchanged year-over-year at $26.2 million.Adjusted international revenue increased by 0.2% year-over-year, primarily due to an increase in Belgium and Singapore offset by lower revenues from the United Kingdom. At 4% of total revenue, North American MSP continues to be the fastest growing business segment. Revenue increased 14% to $9.4 million during the first quarter. The increase is primarily attributable to expansion within existing clients and new wins for payroll services and the revenue associated with clients shifting from North American Staffing. Adjusted revenue increased 13.1%.Moving down the P&L. Gross margin for the first quarter was 14.4% compared to 14.9% in the year ago quarter. The primary drivers for the change in gross margin were smaller credit related to our workers’ compensation versus the prior year, and increase in other state mandated benefit cost and a mix shift within our North American MSP segment.SG&A expense for the first quarter was $39.5 million, compared to $39.8 million in the first quarter of fiscal 2019. The decrease was primarily due to cost reductions in all areas of our business. Lower professional fees and reduced labor costs resulting from lower headcount were partially offset by increased depreciation expense and a number of favorable items from the prior year quarter that did not recur this year, including nearly a $600,000 credit from medical claims experience and $450,000 from lower equity compensation as a result of higher forfeitures in 2019.This quarter also includes a $486,000 increase in expenses due to the elimination of the deferred real estate gain offset under the new lease accounting rules. The comparative impact of this change will recur in each of the subsequent quarters in fiscal 2020. For the first quarter of fiscal 2020, we reported a loss of $10.8 million or $0.50 per share, compared to a loss of $3.2 million or $0.15 in the first quarter of fiscal 2019.The loss during the first quarter of 2020, included $1.2 million of costs related to the ongoing restructuring efforts throughout the company. Adjusted EBITDA for the first quarter was a loss of $5.6 million compared to a loss of $1.1 million in the prior year quarter.Moving on to a few key items from cash flow in the balance sheet. At the end of the first quarter of 2020, we had $30.9 million in cash equivalents and additional $8.5 million in restricted cash and short-term investments. Our long-term debt was $55 million. We have total available liquidity of $17.6 million.Upon adoption of the new lease accounting rule affected the first quarter of fiscal 2020, we recognized the $22.2 million cumulative effect adjustment to retained earnings related to the deferred gain on the 2016 sale and leaseback of real estate as I referred to in my SG&A comments. We generated $33,000 cash flow from operations in the first quarter with capital expenditures of $1.4 million.I will now turn the call back over to Linda who will give greater detail on our outlook and review our strategies.

Thank you, Herb.As I stated in my opening comments, the progress we are making within Volt is not fully reflected in our first quarter results. We continue to make positive strides across our business especially within our North American segment.In our North American Staffing segment, we are experiencing increased revenues from the business we won late in fiscal 2019. The new accounts won during the first quarter are performing in line and in some cases better than initial projection. This progress was more than offset by the ongoing workforce adjustments at certain of our larger clients, combined with a softer ramp from some of our historic seasonal clients.As [technical difficulty] Northern American Staffing segment into our North American MSP segments. This resulted in a loss of approximately $2.6 million in recognized revenue for the quarter, exaggerating the year-over-year revenue decline for our North American Staffing segment.As referenced on our last call, we are in the final stages of completing the training for our everybody sells strategy within our branches and expect to achieve our previously stated goal of everybody selling by the end of this month. This approach is a fundamental change within our branches. A key piece of our strategy for accelerating gross margins is our direct hire placement business. After several slow quarters, we have seen recent progress in this area.Following the holidays, we are seeing substantial increases in both order generation and billing. The January direct hire results outpaced prior year and early indications so that this trend is continuing into Q2.Finally, we are in the process of bidding on multiple opportunities, ranging from new business opportunities with a very attractive market profile to location and market share expansion within existing clients. As an organization, our sales and delivery teams are motivated and are doing an excellent job of targeting accretive new business opportunities.Our North American MSP segment continued its growth through a combination of increasing the suite of services offered, as well as expansion into new sites. After accounting for the revenue shift from our North American Staffing segment, our MSP business grew 13.1% from prior year quarter. We expect future growth will come from both expanding our presence and services with existing clients, as well as new wins over the course of the year.Let me take a minute to explain how a client's transition from North American Staffing to MSP occurs and how this benefits both the client and Volt. So this transition can be a natural progression in the lifecycle of select clients. Many start off with a traditional staffing model and through their own growth and expansion, a broader solution designed to reduce operational costs, improve overall vendor management and allow for scalability in a dynamic environment may be warranted.Fortunately, Volt offers an industry leading solution with a demonstrated track record through our North American MSP organization. A transition to our managed solution offers Volt a greater portion of our clients business. Our MSP manages their total talent spend, expands our footprint within their organization and solidifies the relationship with the client. So this is very good for the company, despite the transition looking different on our income statement because we recognized revenue on a net-net basis versus a gross basis.Regarding our international segment, like other companies that have operations in the U.K., we are monitoring the implications surrounding the completion of Brexit at the end of January, legislative changes, and of course the current coronavirus situation. We expect headwinds in Q2 as these events unfold. The international team remains focused on increased activity levels, order generation and order fulfillment, and accelerating direct hire placement to offset any revenue impact with higher margin performance.Lastly, I would like to provide an update on the strategic transitioning of some of our U.S. based back office positions to Arctern, a Volt company based in Bangalore. The first phase is nearly completed and the overall project remains on schedule. We recently hosted some of our India based employees at our orange office and the group is very excited to be a part of an improving global organization and to participate in this important organizational transformation.We are seeing significant progress made through collaboration with our India based team, and are appreciative of their ongoing commitment, which is vital to our continued efforts to fully transition positions to Bangalore.As we stated on our January call, we anticipate this as well as other strategic initiatives to result in $3 million in cost savings this fiscal year. These savings will be recognized in the third and fourth quarters of fiscal 2020, and we also expect as much as $10 million in savings for fiscal 2021.Before I move to the outlook, I want to address Volt’s preparedness plans in the wake of novel coronavirus or COVID-19. In late January, we established a cross functional Incident Response team to monitor and respond to ongoing development. This team includes representatives of executive management including myself. We implemented - we updated travel policies based on the guidance from the Center for Disease Control, including restricting all travel to high risk countries and restricting non essential local travel.We have prepared our contingency planning mechanisms in the event of office closures or inspections at a client's facility. At present, we have had no reports of COVID-19 cases at any of our own locations or those we service. We have notified our field employees through direct emails and ePayStub channels of the proper sanitation protocol, travel restrictions and processes to follow in the event they are ill or come in contact with someone who is ill.We have established strict guidelines for visitors to our offices and/or our client site. We have enhanced disinfecting scheduling at our clients facilities we service. We have provided guidance to our partners including our associate vendors and subcontractors on both hygiene, travel and visitor policies. We continue our ongoing efforts to inform, educate and drive awareness across our entire workforce.Volt remains committed to ensuring the correct steps are taken to protect our employees and our valued clients as this situation rapidly evolves. Though we are not experiencing any notable business impact that we are aware at that this time, we are closely monitoring real time. The health and safety of our clients, our field employees, and our Volt colleagues remains our top priority.Moving now on to the outlook, we are encouraged by the start of the quarter as we sit here today six weeks in. The favorable trend we expected played out with February performing better than Q1 and early March performing better than February. Given the fluid and rapidly changing market conditions, specifically over the last 24 to 48 hours, we are unclear as to the impact we will realize over the remaining seven weeks.We anticipate there may be some impact however, when and how much remains largely unknown. We do not believe it is prudent to provide guidance at this point in time. We continue to remain optimistic about our ability to achieve improved adjusted revenue and adjusted EBITDA performance in the latter half of fiscal 2020.Before I open the call up for questions, I want to thank each of our colleagues across the globe for the passion, dedication, loyalty and commitment they demonstrate each and every day. They remain steadfast in their desire to deliver outstanding service to our clients and field employees and each individual regardless of role, positively impact our ongoing Volt story.Now, I would like to open up the call for questions. Operator?

[Operator Instructions] The first question comes from the line of Josh Vogel with Sidoti and Company. Please proceed with your question.

I guess to start, it's obviously at the forefront of everyone's mind for all company today and I was just wondering if you can give a little bit more commentary around your liquidity position?

I'm happy to, overall, between, the cash that we have in the banks, and then our borrowing availability, we've got over, $30 million, available to us. Our fixed costs, on a weekly basis, can be as low as about $2.5 million. So, we've got, if there was a extreme, situation, we've got, you're in good position to weather that on top of, very healthy, receivable balance. And so, receivable balance that, well in excess of, the debt that we have against it.So, we feel, very comfortable, we've modeled, various scenarios, including, say if there was, a 10% to 15% reduction, we're covered to manage, what may come from the, any reasonable estimate of what may come from coronavirus.

Okay. That's really helpful. Thank you. I was just curious, when we look at adjusted revenues for North American Staffing, can you quantify what the year-over-year decline was from those specific large clients. And then on the other side of it, it was partly offset. So how much came from new business wins with new clients as well as expansion with existing clients?

Yes, I don't have an exact number on that. But if you remember going back to the last year, we started the - these are the clients that we had in the - starting towards the end of the second quarter, and then also the loss in the third quarter, you know, as well, so we haven't looped on that. But it's - the primary driver of the shortfall really came with that group of clients.

Okay. And looking at the MSP unit, obviously, strong performance there again. And you noted of expansion with the existing clients. I think you had a comment about some new wins for payroll services. I was just wondering if you could talk about the new business pipeline, how it looks today?

Yes, so I'm really proud of the North American MSP segment team. They continuously are driving outstanding results and doing a phenomenal job both with new client wins, as well as expansion within their existing clients. The pipelines are very robust. They've got multiple accounts close to close, multiple accounts that they are targeting, so I'm confident in their ability to continue to drive new business wins, as well as additional expansions as we continue through the year.

Okay. Great. And two more quick ones, and I'll hop back in the queue. Can you remind me - I know we're done with Phase 1, can you remind me the time line of the Arctern transition?

I'm happy to. We had broken down into two phases. And Phase 1 is primarily completed now. So we've actually just now started exiting some of the positions in North America. We've got them virtually fully staffed for Phase 1 in Bangalore right now. So we've had the cross training. So that is well underway. Phase 2 will continue through this quarter with really exiting the positions here in North American in early part of Q3.

Okay, great.

Right now all our hiring plans are on track and moving along exactly on plan.

Okay. Thank you. And obviously, recent market volatility is really sliced evaluations of many companies. And I just - I was curious if there was an opportunity, given what is your appetite in the current market environment to potentially be acquisitive, and if something was too good to pass up. Is that even on the plate right now?

You know, there is so many unknowns out there right now, and typically, our pat answer would be, we'd always consider something that comes to us and if it makes business sense, and that's certainly the case, but with the volatility in the market, I maybe present some opportunities, but then there's also we've got to get a better understanding of the potential risk as well. And that's just hard to do right now.

Thank you. At this time, we've come to the end of our allotted time for today's question-and-answer session. Now I'll turn the call back to Linda Perneau for closing comments.

Thank you. And thank you all for your participation in today's call and for your continued interest in Volt. We look forward to speaking with you again when we report our second quarter fiscal 2020 results in June.