Staffing 360 Solutions, Inc. (NASDAQ:STAF)
Q1 2017 Earnings Conference Call
October 11, 2016, 09:00 AM ET
Darren Minton - Executive Vice President
Brendan Flood - Executive Chairman
Matt Briand - President and Chief Executive Officer
David Faiman - Chief Financial Officer
Josh Seide - Maxim Group, LLC
Greetings, ladies and gentlemen, and welcome to the Staffing 360 Solutions Fiscal First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode and 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.
Thank you, Brenda, and thank you to everyone who has joined us today for Staffing 360’s fiscal first quarter 2017 earnings conference call. I’m joined here today by Brendan Flood, Staffing 360’s Executive Chairman; Matt Briand, President and CEO; and David Faiman, our 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 announcing this call, and will also available on Staffing 360’s website, 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 U.S. federal securities laws concerning Staffing 360 Solutions Inc. Forward-looking statements are subject to a number of significant risks and uncertainties, and actual results may differ materially. Please refer to the company’s filings with the SEC, which 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, October 11, 2016, and Staffing 360 expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call.
During these prepared comments, we also make reference to certain non-GAAP measures such as adjusted EBITDA. Where applicable, we have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measure.
Now with that, I’d like to turn the call over to Staffing 360’s Executive Chairman, Brendan Flood. Brendan?
Thank you, Darren. Good morning and good afternoon to those of you listening in the United Kingdom. As usual on these calls, I will make a few opening 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 to add some detail on the financial statements. At that point, I will discuss our strategic aims before opening the call to Q&A.
This has been a great start to the fiscal year for Staffing 360 Solutions. Although we only just reported our fiscal 2016 results a few weeks ago, our first quarter has already surpassed all of those metrics by delivering the largest quarterly revenue figure in our corporate history as well as a record adjusted EBITDA, which has resulted in improving our trailing 12 months adjusted EBITDA to $5.3 million, a major achievement.
You will hear how our operational performance has continued to make huge strides and how our business margins have continued to improve. As always, we commend each and every one of our employees for the positive improvements that they deliver on a daily basis.
With each quarter that we put under our belt, our strategy of building an international staffing firm with revenues in excess of $300 million has been strengthened, and importantly is being validated. We now find ourselves nearly two-thirds of the way towards reaching this goal.
At this point, I’ll 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’ll provide some of the highlights of our operations, as we continue to grow and implement our acquisition strategy.
First and foremost, we have achieved double-digit organic growth of 14% in fiscal Q1 2017. The first two quarters of the fiscal year are typically our seasonally strongest periods since they are toward the end of the calendar year when temporary staffing sees some of its highest demand, and this quarter did not disappoint.
On top of this, we made two acquisitions since Q1 last year, which ended August 31, 2015, and fueled our growth even further. As you may recall, these acquisitions were Lighthouse Placement Services, which became part of our portfolio in July of 2015, and The JM Group, which was acquired in November of 2015.
Lighthouse provides high-margin revenue and enhances our engineering staffing offering in the Northeastern United States. Meanwhile, The JM Group has been one of the UK’s leading recruitment firms for over three decades with a strong IT focus. In addition to these acquisitions, we have boosted growth by winning several new annual contracts in the consumer goods, education, and beverage industries, which are expected to show more impact over the coming quarters.
This is combined with efforts to maximize efficiencies, including a proactive campaign over the past few years to reduce our workers’ compensation claims, which has translated into over $0.5 million of insurance cost savings per year starting this year. This is a major win as we continue to streamline expenses and increase economies of scale.
In summary, we have experienced over 14% organic growth from the company’s existing staffing divisions in both the U.S. and the UK. We have achieved our largest quarterly revenue and gross profit figures in the history of Staffing 360 Solutions, and our employees have done a fantastic job growing the business and realizing efficiencies.
I will now hand the call over to David Faiman, our Chief Financial Officer for the financials. Dave?
Thank you, Matt, and good morning, everybody. During our fiscal first quarter of 2017, revenue was $47.8 million, which is growth of $11.9 million or 33.1% over the fiscal first quarter in the prior year. That growth is comprised of 14.1% organic and 19.6% from the acquisition of Lighthouse Placement Services and The JM Group.
Foreign currency translation had a negative 0.6% impact due to the weakening of the sterling pound. This quarterly revenue puts us on the annualized run with a new run rate of over $190 million. The mix of revenue continued its shift to the professional higher-margin business contributing 49% of the overall revenue as compared to 40% in the prior year.
Overall, growth in professional was driven not only by the acquisition of Lighthouse and The JM Group, but also by 11% underlying organic growth, while our light industrial business grew 15% organically.
Gross profit expanded further than revenue with 34.3% growth from $6.3 million to $8.5 million. Gross margin also expanded from 17.6% to 17.8%, or 20 basis points, driven by the revenue mix shift to professional I just mentioned. While operating expenses grew $1.7 million on an absolute dollar basis, primarily from the acquisitions made during the year, we continue to realize economies of scale illustrated by the significant decrease in operating expenses as a percentage of revenue from 19.2% in the prior year to 17.7% in the current year, or a 150 basis point improvement.
Cash operating expenses, which exclude depreciation, amortization, and other non-cash charges grew on an absolute dollar basis by approximately the same amount, but improved to 15.7% of revenue. This operating performance translated into the company’s first ever positive operating income of 46,000, as compared with a loss of 574,000 in the prior year, a significant milestone and another step towards positive net income.
For the quarter, net loss was $1.3 million as compared with $1.7 million in the prior year, a 22% improvement. Finally, adjusted EBITDA grew 184% to $1.8 million, increasing the company’s trailing 12 months adjusted EBITDA to $5.25 million, a 27.7% increase from the end of the fourth quarter, and an over 200% increase over the comparative trailing 12-month period in the prior year.
Applying the trailing adjusted EBITDA results, our leverage ratio defined as the gross value of debt, less cash and cash equivalents divided by trailing adjusted EBITDA declined from 9.3 times to 1.9 times, driven not only by our significant growth in adjusted EBITDA, but also the reduction in total debt.
Finally, turning to cash flow. Cash flow used by operating activities was $2.2 million, reflecting the significant growth in revenue. So to recap our achievements, we set a new quarterly revenue record of $47.8 million. This quarter’s revenue puts us on an annualized run rate of over $190 million. The company has reported its first ever positive operating income.
We have reported positive adjusted EBITDA eight quarters in a row. Trailing 12 months adjusted EBITDA is $5.25 million and over 27% increase sequentially from the fourth quarter of fiscal 2016 and a 200% increase over the prior year comparative period, and our operating expenses and leverage ratio continue to improve.
At this point, I will hand the call back to Brendan before we open the call for Q&A.
Thank you, Dave. As mentioned on our last call, there are a number of key initiatives for Staffing 360 Solutions in fiscal 2017. Most importantly, there is the organic growth of our existing business and the conversion of this growth into additional EBITDA and cash flow. Achieving double-digit organic growth this quarter is a great achievement, and we will continue to drive these metrics through our existing operations.
We are highly focused on strengthening our balance sheet and on delivering the strong M&A program that we have been following. Executive management team is acutely aware of the importance of these two items to our loyal shareholder base. We anticipate being able to bring additional news in this regard in the near-term, and we believe strongly that the strategy of the company is getting us ever closer to our goal of $300 million in revenue.
In conclusion, we have just delivered a very strong start to our fiscal year, and we are looking to continue this trend into the fiscal second quarter.
Operator, at this point, I would like to hand the call over to a Q&A session please.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from line of Brian Kinstlinger with Maxim Group. Please go ahead with your question.
This is actually Josh Seide in for Brian. Thanks for taking the questions. Can you give us maybe an update on your goals for building out any particular verticals as a mix of revenue through future M&A?
Thanks, Josh, this is Brendan, I’ll start and then maybe Dave or Matt will want to join in. We’ve made no secret of the fact that there are – the way in which we plan to build the company is driven around the skill sets of our candidate base. So we’ll acquire businesses that operate in accounting and finance, information technology, engineering, administration, and in the U.S. only light industrial.
Our expectation is that a lot of our growth will come from IT, some of it will come from engineering, but specifically, because IT and light industrial are the largest two verticals within the temporary staffing industry. So that’s where a lot of our focus will be, but we do want to spread it across all of our five, what we call, our strategic pillars.
That’s helpful. Thank you.
Okay. Thanks, Josh.
Okay. And we’ll pause for one more moment. [Operator Instructions] And that marks the end of our question-and-answer session today. Does anyone in the team have any closing comments.
Okay, thank you, Brenda. As per usual, I hope that what you’ve heard about our latest quarter, we will continue to assure you that Staffing 360 Solutions represents a tremendous opportunity for rapid growth in both United States and the United Kingdom.
As we continue to improve our balance sheet to exceed our operational milestones and to get closer to our stated aim of achieving a $300 million run rate, we believe our full potential will begin to be realized. As a team, we remain committed to growth in revenue, to growth in earnings, and to growth in shareholder value. Brenda that is the end of our call. Thank you all again, and have a very pleasant day.
Okay, thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.
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