Staffing 360 Solutions, Inc. (NASDAQ:STAF)
Q3 2016 Earnings Conference Call
April 12, 2016, 09:00 AM ET
Darren Minton - EVP
Brendan Flood - Executive Chairman
Matt Briand - President and CEO
David Faiman - CFO
William Gregozeski - Greenridge Global
Greetings ladies and gentlemen, and welcome to the Staffing 360 Solutions Fiscal Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 Darren Minton, Executive Vice President of Staffing 360 Solutions. Mr. Minton, you may begin.
Thank you, Melissa, and thank you to everyone who has joined us today for Staffing 360’s third quarter 2016 earnings conference call. I’m joined here today by Brendan Flood, Staffing 360’s Executive Chairman; Matt Briand, our President and CEO and David Faiman, our new Chief Financial Officer.
I want to bring to your attention that a webcast and replay of this conference call is available by following the link contained on the bottom of the press release announced this call. It’s also available on Staffing 360’s website, which is www.staffing360solutions.com.
Now before we get started, I’ll take a brief moment to read the Safe Harbor statement regarding today’s conference call. This conference call will contain forward-looking statements within the meaning of the U.S. Federal Securities laws concerning Staffing 360 Solutions, Inc.
Forward-looking statements are subject to number of significant risks and uncertainties, and actual results may differ materially. Please refer to the company’s filings with the SEC which may contain and identify important risks and other factors that may cause Staffing 360’s actual results to differ from those contained in our forward-looking statements. All forward-looking statements are made as of today, April 12, 2016 and Staffing 360 expressly disclaims any obligation to revise or update any forward-looking statements as on the date of this conference call.
Finally, we make reference to several non-GAAP measures such as adjusted EBITDA. This is reconciled from net loss to adjusted EBITDA and is provided in this morning’s press release.
Now with that, I’d like to turn the call over to Staffing 360’s Executive Chairman, Brendan Flood. Brendan?
Thank you, Darren, and good morning to everybody in the United States and good afternoon to everybody listening in the United Kingdom. As per usual, I will make a few opening high level remarks. I will then hand the call over to Matt Briand for some extra color on the performance of our operations and to David Faiman who will add some detail on the financial statements. At that point, I will provide a summary of our core initiatives before opening the call to a Q&A session.
During the course of our third quarter, we delivered a new record level of revenue, a record level of gross profit and positive adjusted EBITDA for the sixth quarter in a row. We were also operating cash flow positive. Despite making six acquisitions in a little over two years, we have kept our eyes keenly on our strategic targets of $300 million in annualized revenues, a strong M&A program with intelligent integration and a firm handle on the financial drivers and seasonal issues within each of our businesses, which is why I am very pleased that we have strengthened our management team with the arrival of David Faiman as our new Chief Financial Officer.
Subsequent to the end of the third quarter, our Form S-3 Universal Shelf Registration was declared effective by the SEC, which is very exciting for us. The S-3 has a number of impacts. It registers approximately 4.6 million of previously unregistered shares thereby increasing the total amount of the free float shares and adding to the liquidity of our stock.
In addition, we initiated a tender offer to clean up our warrant overhang by offering warrant holders the option to convert to common stock at a ratio of 20 to 100. And finally and perhaps most importantly, the registration allows us to tap to public markets for additional capital, which we successfully tested last week when we raised $2 million in equity. We were very pleased with the response and the offering closed within two working days from start to finish. Recently, we received a huge boost with our first analyst coverage since becoming a NASDAQ listed company with a 5 rating.
In summary on the opening remarks, we are very pleased with where we are in our development plan and we commend each and every one of our employees for the positive improvement that they deliver on a daily basis.
At this point, I will hand the call over to Matt Briand, our President and CEO for an update on our operational performance. Matt?
Thank you, Brendan, and good morning everyone. Before Dave dives into the financials, I will provide some of the highlights of our operations as we continue to grow organically and implement our acquisition strategy. First and foremost, Monroe Staffing, our largest brand has been undergoing some expansion recently. As mentioned in our last conference call, Monroe continues to expand its footprint outside of New England. We identified a new office location in Concord, North Carolina, our third North Carolina office location and successfully opened in March of 2016. As a result, Monroe now has over 15 offices across the East Coast and six onsite locations.
Lighthouse Placement Services, which became part of our portfolio in July, has been another great addition to the team.
Lighthouse enhances our engineering staffing offering through international enterprises and defense contractors in Eastern Massachusetts/New Hampshire. Although we have only had Lighthouse under our belt for two full quarters, they bring 15 million in annualized revenue to the table and another great growth story to the mix.
Speaking of growth, we are also pleased to have The JM Group join the Staffing 360 family since the acquisition occurred just before the start of fiscal Q3 in November. The JM Group has been one of the UK’s leading recruitment firms for over three decades with over 25 million in revenue. In addition, due to The JM Group’s proximity to the existing Longbridge office, we talked about some potential synergies during last quarter’s earnings.
To that point, we are very pleased to announce on this conference call that our Longbridge operations and The JM Group have officially combined operations and merged office space in London. So now all of our UK staff are under one roof. We are keeping the brands distinct, however, the amount of energy in this space is electric and we are saving approximately 20,000 per month with enhanced synergies between the two groups. Needless to say, we are pleased to have them join in the Staffing 360 journey, which has allowed us to achieve our current $170 million run rate.
Across all of our operations we are pleased with the revenue of 44 million especially in our winter quarter, our largest quarterly revenue and gross profit figures in the history of Staffing 360 Solutions. Our employees have done a fantastic job growing the business and we now have over 4,000 temporary associates.
As mentioned on many of our past earnings calls, we have a pipeline of potential acquisitions that would bring us past our publicly stated goal of 300 million in revenues. As we continue to grow organically and raise capital to fund our acquisition strategy, we believe Staffing 360 is looking forward to a very bright future in 2016.
I will hand the call over to David Faiman, our Chief Financial Officer for the financials. David?
Thank you, Matt, and good morning everyone. It’s a pleasure to be here on my first Staffing 360 Solutions earnings conference call. Despite having only recently joined the team, I can tell you that the flurry of positive developments over the past few weeks and months are setting the stage not only for exciting growth but also strengthening of the company’s financial profile.
As you may have seen in our earnings release this morning, we reported the following. First, revenue of 44 million, which is an increase from 41.3 million sequentially over Q2 of 2016 and 31.0 million in Q3 of 2015. Second, gross profit of 7.6 million, which is an increase over 7.5 million for Q2 of 2016 and 5.5 million in Q3 of 2015. Adjusted EBITDA of 956,000, which is up over 500% from 149,000 in Q3 of 2015 and positive operating cash flow for the nine months ended February 2016 of 2.2 million versus a use of cash of 1.2 million for the same period in the prior year.
First and foremost, there is no missing the 42% increase in revenue over the prior year. For companies undertaking a buy and build strategy, revenue growth is a critical metric and while our revenue increase includes a full quarter of The JM Group acquisition, we also realized organic growth of 11%. Allowing for seasonality, our annualized run rate based on 44 million of revenue this quarter puts Staffing 360 comfortably over 170 million, which means we are now more than halfway to our publicly stated mission of $300 million in revenue.
Gross profit of 7.6 million is a 38.2% increase from the 5.5 million in Q3 of the prior year and reflects gross margins of 17.3% and 17.8% respectively for both periods. The decline in gross margin from the prior year reflects the addition of The JM Group which operates at slightly lower margin. Otherwise, each of our businesses have been very successful at maintaining margins as we continue to grow.
Gross profit of 7.6 million is sequentially only slightly higher than our gross profit of 7.5 million and is a decline in gross margin mainly due to the resetting of our pseudo-taxes which tend to cause an increase in expenses early in the calendar year but winds down as the year progresses. In Q3 of 2016, the impact of the pseudo-taxes resetting is approximately $250,000.
Our operating expenses of 8.2 million is an increase of 1.8 million over the prior year reflecting the addition of costs associated with the Lighthouse Placement Services acquisition we completed in July of 2015 as well as the acquisition of The JM Group this past November.
With that said, as the company has discussed on prior calls we have made significant strides in managing and reducing our overhead costs, the outcome of which is illustrated when viewing our operating expenses as a percentage of revenue, which was 18.8%, an improvement of 210 basis points from 20.9% from the prior year. All of the factors I’ve discussed translate into an overall 30% reduction of our operating loss from the prior year and over 500% increase in our adjusted EBITDA to 956,000 this quarter.
Finally, our net loss in the quarter was at 1.7 million versus 78,000 in the same quarter last year. The increase in the loss is primarily due to non-cash accounting expenses resulting from some of the actions we have taken to improve the capital structure as well as a few nonrecurring charges.
Last but certainly not least I’d like to talk about our operating cash flow. For the nine months ended February 29, 2016, our cash flow from operating activities was a positive 2.2 million, a tremendous improvement over the prior year operating cash flow use of 1.2 million. This massive positive reversal serves to further solidify the notion that the company is at that critical inflection point where it has started to generate positive cash flows and is capable of generating real and meaningful adjusted EBITDA and cash flow results.
In conclusion, I want to reiterate that we’re very pleased with our results. We have reported positive adjusted EBITDA six quarters in a row, we have delivered record positive cash flow from operations and going forward we see all of this as being sustainable with further additional opportunity for improvement. As EBITDA profitability begins to take hold, we believe the capital markets will start to affect the company’s financial performance and opportunity.
At this point, I will hand the call back to Brendan for closing remarks.
Thank you, Dave, and welcome to the team. As mentioned on our last call, there are a number of key initiatives for the group during the current calendar year. Most importantly, there is the organic growth of our existing business and a conversion of this growth into additional EBITDA and cash flow. This is a major reason that we are here and we’ll continue to drive these metrics.
Also, as mentioned on our last conference call, we will host our first ever annual shareholders’ meeting to give our investors an addition opportunity to meet with the Board and with management and to formalize a number of items that have been identified over the past year or so. More details on that to follow.
As we begin to look forward, our main aims for the remainder of 2016 calendar year are continued strong organic revenue growth and operation performance, continued M&A activity including major acquisitions that are in the works and importantly continued strengthening of our balance sheet and cash performance. In conclusion, our business plan continues to work and we believe that our activities will continue to deliver over the coming quarters.
Operator, at this point I would like to hand the call over to a Q&A session.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of William Gregozeski with Greenridge Global. Please proceed with your question.
Hi, guys. Congratulations on another profitable quarter. Now that you are on the NASDAQ and you have the S-3 approved, do you think you’ll need to issue more preferred shares? And for the targets in your pipeline, are they more willing to take a greater percentage of stock now that it is NASDAQ listed and there is hopefully a little more liquidity coming?
Thanks, William. This is Brendan, so I’ll answer the second part of the question first. The answer is absolutely yes and there is always a trepidation for anybody in taking stock of an OTC company. Now that we’re on NASDAQ, the acquisitions that we’re talking to within our pipeline are more open to using our stock as a currency. In relation to preference shares, it will be more about the pragmatism that’s required as a point in time that we raise the money. The preference shares that we raised last week, the Series C were kind of a stepping stone to common stock and those Series C shares are expected to convert into common stock on an ongoing basis at some point over the next 6 to 12 months. So our preferred group is common stock but so long as we can structure it so that our common stockholders are not being adversely impacted, we will use preference shares as a pragmatic business decision.
This is Darren speaking. Just as far as the preference shares, as Brendan mentioned they are convertible on a one for one basis, the Series B and the Series C and they really are very benign. There’s no voting rights, dividends or anything else. They are basically a placeholder for conversion into common stock at a future point in time.
Okay. Thanks, guys.
Thank you, William.
Thank you. [Operator Instructions]. We do have a follow-up question from the line of William Gregozeski with Greenridge Global. Please proceed with your question.
Without going into giving specific guidance, just looking at the five pillars that you compete in just spread across the U.S. and in Europe, so not specific to your territories, what kind of growth rate are you guys seeing for those industries this year?
This is Matt. I can take that. So the industry average is high single digit rates and what we’re seeing across the five pillars within our organization, we’re seeing higher growth rates within our light industrial business and then followed by the professional services and those are going to be in the low to mid-teens.
Okay. Thank you.
Thank you. [Operator Instructions]. Ladies and gentlemen, that marks the end of our question-and-answer session today. I’ll turn the floor back over to management for any closing comments.
Thank you, Melissa. So just to summarize before the end, you have heard me state before that one of our internal mantras is that we do what we say we are going to do. I’m hopeful that the progress that we made over the past 12 months and in our most recent quarter will have given you comfort that this is true that our activity and momentum is in a positive direction and that we represent an opportunity for tremendous growth.
This is especially the case with things like Staffing 360’s first initiation of research coverage and our increased marketability as a NASDAQ listed company. Combined with other great milestones having in such short order, such as our record quarterly revenue and our S-3 filing becoming effective, which has allowed us to test the waters and raise new capital and to grow our operations and help to right shape our balance sheet.
We are at a very strong position to propel our growth and to take our business to the next level. As always, by delivering in our strategic aims, we remain committed to growth in revenue, to growth in earnings and to growth in shareholder value. Operator, that is the end of our call. Thank you all again and have a very pleasant day.
Thank you. Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.
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