VOLT - NASDAQ

Greetings, and welcome to Volt Information Sciences Third Quarter 2020 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, Mr. Joe Noyons, Investor Relations.

Thank you, Lauren, and good afternoon, everyone. Thank you for joining us today for Volt Information Sciences Third Quarter Fiscal 2020 Earnings 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 third 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 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, including, but not limited to, potential impacts of the COVID-19 pandemic on our business operations. We refer you to Volt Information Sciences' recent filings with the SEC for a more detailed discussion of the risks that 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 to Volt’s third quarter fiscal 2020 earnings call. I hope that everyone continues to remain safe and healthy. Today, I will open the call with high-level commentary on our third quarter results, specifically the impact of COVID-19 on Volt’s business operations and the steps we have taken to preserve and improve our financial position. Herb will provide a more detailed overview of our financial performance. I will then provide some additional insights into the progress we are making on several of our strategic initiatives despite the ongoing impact of the COVID-19 health crisis. And finally, I will briefly provide some recent trends we are seeing as we move through our fiscal fourth quarter. Let me start first with an overview of Q3. The effects of COVID-19 continued throughout the third quarter. But we were encouraged to have realized moderate month-over-month improvement as the economy gradually recovered and businesses slowly reopened. As we shared during our prior quarter earnings call, the COVID impact extended beyond April with revenue hitting a low point in May. After what we believe to be the trough of a decline of 25% in the month of May, we saw June rebound to negative 16% and further progression in July to negative 14.6%. Barring any unforeseen resurgence of COVID-19, we believe the worst is behind us, although we expect the labor market recovery will be gradual. Overall, I remain incredibly proud of our Volt colleagues, all of whom continue to confidently navigate the prolonged economic and health uncertainties. Their efforts during the third quarter allowed us to return thousands of employees back to work, enabled multiple clients to resume full operations and secured new business wins. The swift and decisive actions taken to better align SG&A with our current and ongoing operations have proven to be quite successful in improving our financial position. As a reminder, during last quarter’s call, we introduced our Phase 3 reduction, a series of short-term and long-term measures including temporary pay cuts for myself and Herb; reduced fiscal 2020 annual fees for the directors; reduction in overall incentive compensation; temporary suspension of the company’s match to retirement accounts; a broad based hiring and salary freeze; additional reductions of headcount and extension of certain furlough periods; and the closure and/or consolidation of underutilized real estate throughout North America. These actions, combined with our previously reported Phase 1 and Phase 2 actions were integral in us achieving positive adjusted EBITDA in the months of June and July and for the full quarter. We are on track for the previously reported SG&A reduction in 2020 and 2021, accelerating Volt to profitability. And finally, even in a face of rising COVID-19 cases, and lingering negative business impacts, we have been successful in continuing our technology enhancements, expanding our retail revenue throughout our commercial and technical branch networks, and securing new business wins, many of which have ramped quickly and contributed to our sequential month-to-month revenue improvement. I’ll talk about these in greater detail in a few minutes. I will now turn the call over to Herb to discuss the financials, as well as the individual business unit performance. Herb?

Thank you, Linda, and good afternoon, everyone. Revenue for the third quarter of fiscal 2020 was $185.9 million. Adjusted revenue decreased $42 million or 18.4% year-over-year. We estimate the revenue decline associated with the impact of COVID-19 to be approximately $43 million to $47 million for the third quarter. Majority of the COVID impact was in our North American Staffing segment. After revenue hit a low point in May, revenues have sequentially increased. May was down 25%, June 16%, and July 14.6%. The improving trend is a result of a combination of existing customers returning to work, expanding business with existing clients, and winning new logos. Our Direct Hire line of business continues to be impacted by COVID. In quarter two we had seen opportunities deferred, which we began capturing in Q3. For the quarter, we were down 35%. However, the monthly revenue trend was showing improvement during the quarter. We improved during the quarter with May down 36% and July down only 31%. Preliminary August Direct Hire revenue was only down 17% from last year continuing the positive monthly trend. Looking at our business segment results. North American Staffing represented 83% of overall revenue during the third quarter. Revenue from this segment was $154.7 million and operating income was $2.7 million. Adjusted revenue decreased 18.6% or $35.4 million during the quarter. As Linda previously mentioned, the teams had success throughout the pandemic in expanding existing clients, winning new logos across the retail branch network, as well as larger opportunities. The segment incurred restructuring and impairment charges of $2.1 million this quarter, compared to 79,000 last year, due to headcount reductions and facility closures where we could support our clients and specific markets while working remotely. Excluding the impact of these cost, operating income increased 7.6% year-over-year. Our International Staffing business reported revenue of 21.7 million, which represented 12% of total revenue in the third quarter and operating income of $551,000. Adjusted revenue decreased by 23.9% year-over-year, primarily due to adjustments of work orders related to pending statutory legislation changes in the UK, as well as impact from COVID. The UK economy has been heavily impacted by COVID, which has slowed our recovery offsetting the challenges in the UK was our performance in Belgium and Singapore, which were actually both up about 9% over last year for the quarter, as a result of improvement in contract labor, partially offset by COVID-19 related decreases. At 5% of total revenue, North American MSP revenue was $9.4 million with operating income of $944,000. Adjusted revenue decreased 2.1% during the quarter. The decrease is primarily attributable to the impacts of COVID-19 headcount reductions in a small number of clients offset by expansion within existing clients and the incremental revenue associated with certain clients shifting into this segment. Moving down the P&L. Gross margin for the third quarter was 16.1%, compared to 15.3% in the year ago quarter. Excluding a business exited in the prior year, gross margin increased 60 basis points from 15.5%. The primary driver for the change in gross margin was approximately $700,000 favorable workers' compensation adjustment relating to reduced claims liability and reduced payroll tax rates. Benefiting from our disciplined pricing approach, we were able to more than offset in concessions we had to make from a pricing perspective in a highly competitive environment. SG&A expense for the third quarter was $31.2 million, compared to $38.4 million in the third quarter of fiscal 2019. The decrease was primarily due to strategic cost reductions, COVID-19 restrictions on travel and working remotely including $5.4 million in labor and related cost due to lower headcount and lower incentives, approximately $700,000 in lower travel expenses and solid declines in medical cost, consulting fees, facility related cost and supplies. Some of these savings were on a one-time basis and may not recur going forward. These decreases were partially offset by a $486,000 increase in expenses due to the elimination of a deferred real estate gain offset under the new lease accounting rules. As a reminder, the comparative impact of this change will recur in the fourth quarters of fiscal 2020. Impairment cost increased $2.3 million in the third quarter of fiscal 2020, primarily due to $2.4 million of impairment charges, as a result of consolidating and exiting physical branch locations where we can remotely, effectively and sustainably support our clients and business operations. I want to emphasize however that we are not exiting markets. We are well prepared to support and expand in some markets without having actual brick and mortar locations. Restructuring and severance cost decreased $1.5 million in the third quarter of fiscal 2020, primarily due to $1.4 million of restructuring and severance cost incurred with the exit of our customer care business in the third quarter of fiscal 2019. For the third quarter of fiscal 2020, we reported a GAAP net loss of $4.8 million or $0.22 per share, compared to a GAAP net loss of $6.1 million or $0.29 in the third quarter of fiscal 2019. The loss during the third quarter of 2020 included $2.9 million or $0.13 per share of impairment and restructuring cost related to the ongoing cost reduction efforts we have to complete. In addition to the improvement year-over-year, we continue to improve sequentially each quarter. Adjusted EBITDA for the third quarter was a positive $1 million, a $2.2 million improvement from the prior year quarter, as well as a $2.4 million improvement from FY 2020 Q2. This sequential and year-over-year improvement is significant especially when you consider that we are able to accomplish amidst the ongoing pressure on our top-line as a result of the pandemic. Moving on to a few key items from cash flow and the balance sheet. At the end of the third quarter of fiscal 2020, we had $30.9 million in cash and equivalents and an additional $24.3 million in restricted cash and short-term investments. Our long-term debt remain the same as last quarter at $60 million and total available liquidity increased from $12.1 million at April to $16.2 million in July as a result of deferred payroll tax payments under the Cares Act. In addition, our team has done a fantastic job maintaining a strong working capital discipline working closely with clients to mitigate pressure to stretch payment terms. Through our efforts DSOs have improved three days from the previous quarter. As a reminder, due to the passage of the Cares Act legislation in March, we were able to defer the payment of the social security portion of our calendar 2020 payroll taxes. Based on our current payroll, we will likely defer $23 million to $25 million of payments this calendar year. Half of this balance will be due at the end of calendar 2021 and the other half due at the end of calendar 2022. This action provides greater financial flexibility for Volt under the 18 to 24 months. We generated $2.2 million in cash flow from operations in the third quarter with capital expenditures of $833,000. Next our strategic cost saving initiatives are on track and we remain confident we will realize $14 million in annual savings from fiscal year 2020 and an additional $18 million in FY 2021 for a total of $32 million in cost reductions. I want to point out that these are not merely interim or COVID imposed cost saving measures, but more transformative changes to our cost structure going forward. With these swift and substantive actions, we are already beginning to experience early favorable effects more than offsetting the COVID-related decrease in gross profit dollars for the third quarter. In conclusion, we have improved our operations and streamlined our cost structure allowing us to emerge stronger than we have been in recent history. The difficult decisions and actions we have taken resulted in significantly improved financial results and builds the foundation for Volt returning to profitability in 2021. I will now turn the call back over to Linda.

Thank you, Herb. Turning to our key initiatives, since the beginning of the pandemic, our focus has been on aligning our cost structure with the impending revenue decline, while maintaining the flexibility in our end to structure to capitalize on opportunities as our economy rebounds. Our technological enhancements are more important now than ever, as COVID forced us to operate differently. Our investments in this arena are helping to add value to our field employees and clients, broaden our recruiting and sourcing efforts and improve the overall experience with Volt. During the third quarter specifically, we implemented two technology enhancements designed to improve and expedite the candidate onboarding experience, bolster retention and redeployment opportunities and enable real-time satisfaction feedback. The tool also gives us the ability to capture net promoter score results, an indication of field employee and client satisfaction. These represent only two examples of the many functional aspects of these tools that we will continue to leverage over the next several months to improve productivity and performance. We continue to make progress on the expansion and growth of the retail business. As a reminder, the term retail relates to the transactional, higher margin business pursuits across our commercial and technical branch network. Throughout this crisis, this specific retail revenue performance had proven to be more stable and sustainable due to the transactional nature of the business, the much shorter sales cycle and the ability to have more control over replacement. The team’s success with new business wins has minimized the retail revenue decline to roughly 1% versus the 20% we have seen on larger clients. As a result of our shift to an everyone sells mentality, our disciplined model and accountability to key activity metrics, retail now represents nearly 20% of total North American staffing revenue, a 300 basis points improvement from the same period last year. Overall gross margins have also improved as this model has matured over the past 12 months and on average gross margins for our branch network in the third quarter was 500 to 600 basis points higher than non-retail business. In addition to retail expansion, our sales and operations team have been focused on safely returning thousands of field employees to work, expansion opportunities with existing clients, as well as new business wins. During the third quarter, we are pleased to report that the majority of existing clients, previously dormant in the second quarter have resumed operations at varying capacity although many are operating at much lower headcount than the pre-COVID timeframe. On an even more positive note, we have 23% of our clients who have seen a more accelerated recovery in the third quarter and current headcount levels exceed pre-COVID levels. In total, our teams made 20% more placements in the third quarter versus the second quarter. Our teams were successful in solidifying opportunities with existing clients in markets both have not previously serviced. Some examples of this include an opportunity we were given by an existing client in California due to the outstanding local relationship and we were asked to expand quickly in Texas. The Texas team performed exceptionally well and very quickly ramped to a 100 headcount opening the door for additional substantial growth opportunity in the Midwest. Our another existing client example, where the program team has been working diligently over the past 12 months to expand and strengthen the relationship, they have made significant progress and as a result of their efforts Volt became a top tier provider for the first time in four years and we were recently asked to assist in staffing several hundred people in a new location they built to support the manufacturing and distribution of critical personal protection equipment. Our VCG teams also realized expansion within many of their existing MSP clients. Predominantly in the healthcare arena, the expansion opportunities included the addition of new divisions or service lines under the Volt program or the transitioning of employees as a result of acquisitions. New business wins and implementations also played a key role during the third quarter. Since we started to experience an acceleration of meetings, site tours and RFP decisions in the latter part of May, the sales team closed multiple deals in industries such as call centers, healthcare and consumer ecommerce. One example is a new win early in the quarter with a healthcare organization on the West Coast. The client initially allowed us put in the door and due to the team’s success in placing quality talent in a short period of time, quickly accelerated to over a 120 headcount. Our another example of a win was a consumer ecommerce client who was already partnered with another provider. Again, the local team wrote to the occasion and today has nearly 100 headcount on site taking market share from the competitor daily. The efforts referenced above were meaningful for the quarter and allowed us to partially offset the COVID-19 impacts. In North American Staffing segment alone, revenue and headcount grew week-over-week 9 out of the 11 non-holiday weeks in the quarter. Last but not least, a large percentage of our Volt colleagues continue to work remotely and have adjusted well to the changing demand necessary to operate differently. The teams have adopted virtual processes in lieu of in-person meetings and events including

[Operator Instructions] Our first question comes from the line of Josh Vogel with Sidoti & Company. You may proceed with your question.

Thank you. Good afternoon, Linda and Herbert, hope you are doing well.

Doing great, Josh. Thanks.

Great. My first question, I guess, based on your commentary, Linda, you gave some examples of some recent wins and I was just wondering if you can maybe talk about the new business wins in general. The size of the deals you are seeing in the pipeline, as you said, you saw an acceleration in headcount to 100 to 120 and some examples, how that compared to what you saw in prior quarters both during and pre-COVID. And just talk about the prospect pipeline in general. Thank you.

Yes. So, here is what I’ll say, Josh, we have been doing a very nice job of selling new business over the past really 18 to 24 months. That has certainly accelerated as we have built more robust pipeline and certainly been able to get out there in front of more prospects. When we think about the size of our pipeline, our pipelines continue to double when we look at them year-on-year. They are – we monitor those. They are very substantial individuals. I’ll frame it up for you a little bit this way and this is specific to VWS. So, VWS had roughly $47 million in impact with let’s call it, the decline exiting the third quarter from pre-COVID levels is roughly $27 million. So that $20 million was actually made up by the team through putting thousands of people back to work in the quarter, expansion opportunities that we have with existing clients, as well as new business wins.

That’s helpful. Thank you. And what about just streaming the size of a new retail client versus non-retail opportunity?

Yes. So, retail, as we define it the more transactional and higher margin are generally clients that spend $1 million or less. I say generally because that’s not always the case. They certainly could spend more than $1 million and it’s still be classified as a retail client. But that’s kind of it’s a guideline; non-retail then would be everything over and above that.

Okay. Great. And obviously, a nice theme that is prevalent is the technology enhancements and you had the announcement in July with a employee stream incents and helps streamline recruiting and onboarding and maybe it makes sense for now partnerships to get this technology and maybe not for these tools in particular. But have you thought about maybe doing any of this internally investment-wise to make the enhancements for the clients and candidates or should we expect to see more similar type partnerships in the future?

In the short-term, you can expect to see more these types of partnerships with some various vendors as we move through the next several quarters.

Okay. And now that we are two months in from that that particular announcement, any insights or quantifiable data you have with regard to how these tools are being received by the candidates and the clients and maybe on the candidate side are you seeing meaningful improvement in their engagement.

Yes. So, two months is a relatively short period of time. So, I wouldn’t necessarily call it a trend. In this scenario, given that there is a learning curve, there is a learning curve from our own Volt colleagues, as well as with our field employees. I can tell you that in the quarter, we sent out over 30,000 surveys. So, we’ll continue to monitor this. We’ll continue to look for benchmark data. So we can set some goals and targets for ourselves in terms of best-in-class net promoter scores and those types of things. And then we’ll build operational strategies around that to make sure that that we can achieve those goals. So, certainly more to come on that. I think it’s a little bit too early to talk specifically about trends.

Sure. Sure. Last quarter, you talked about some opportunities that were created to meet COVID-specific demand, like temperature scanning, social distance requirement seeking, cleaning and I was wondering if you are still seeing that or if any of that business that the new opportunities that came about in Q2, do you think there is an opportunity here for that to be long-term business?

Yes. So, I think, here is the great news. The great news is that some of those emerging skills that were created in Q2 have now become skills that will be part of our wheelhouse long-term. So, that will be part of what were our capabilities for the foreseeable future. The really interesting part about that earlier statistic that I gave you in the $20 million, roughly $5 million or less of that was actually related to COVID-specific roles. So, the team is doing a great job of going out there and solidifying that revenue with the non-COVID-related positions.

Alright. The cost – some of the cost saving initiatives and the real estate rationalization is going on throughout North America, is there an opportunity to do that outside of the U.S. or North America?

Herb, do you want to take?

Yes, Josh, we are continuing to look at that and see what we can do there. We’ve obviously been working remote in for this period of time. So we are evaluating that. There is pros and cons both ways. But we are certainly looking at that on an ongoing basis.

Okay. And just lastly, and if you said it Herb, and I missed and I apologize, but did you mentioned or give any sense of restructuring and impairment charges that maybe taken in Q4, based on the ongoing rationalization and the three phases of the cost saving initiatives?

I did not mention anything for Q4 and we are continuing to evaluate opportunities, but there is nothing definitive at this point.

Okay. Great. Well, thanks for taking my questions.

Thanks, Josh.

Thanks.

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

Thank you, operator and thank you to everybody 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 fourth quarter and fiscal 2020 results in January 2021. Stay safe. Thank you.