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Executives

Ron Kochman - Head of Investor Relations, Vice President

Jack Egan - Senior Vice President, Chief Financial Officer

Steven Shaw - President, Chief Executive Officer

Analysts

Josh Vogel - Sidoti & Company

Greg Hillman - First Wilshire Management

Volt Information Sciences, Inc. (VOL) F3Q08 Earnings Call September 4, 2008 11:00 AM ET

Operator

Welcome to the Volt Information Sciences, Inc. first quarter 2008 earnings conference call. (Operator Instructions) Now, I’ll turn the call over to Ron Kochman, Head of Investor Relations and Vice President of Volt Information Sciences Incorporated.

Ron Kochman

Thank you and good morning, I’m Ron Kochman, Head of Investor Relations and Vice President of Volt Information Sciences Inc., and I would like to welcome you to Volt’s fiscal 2008 third quarter investment community conference call. In a moment Jack Egan, Senior Vice President and Chief Financial Officer will be reviewing our quarterly financials and then Steven Shaw our President and Chief Executive Officer will be providing additional commentary.

Before officially starting the discussion of our results, I’d like to read to you our standard corporate disclaimer. Statements in this conference call and associated webcast concerning future results, performance, expectations or intentions are forward-looking statements.

Actual results, performance or developments may differ materially from forward-looking statements as a result of known or unknown risks, uncertainties and other factors including those identified in the company’s filings with the Securities & Exchange Commission, press releases and other public communication. Volt Information Sciences Inc. undertakes no obligation to update any information presented in this discussion.

Now I’d like to turn the call over to Jack Egan, Senior Vice President and Chief Financial Officer for Volt Information Sciences Inc. Jack.

Jack Egan

For the third quarter of fiscal 2008 that ended July 27, the company reported net income of $4 million or $0.18 per share compared to a net income of $9.1 million or $0.40 per share in the previous year’s comparable quarter. The results of the directory systems including DataNational, but excluding the Uruguayan operation, which are in the process of being sold to YPG has been classified as discontinued and are not reflected in the following financial results.

The company reported a segment operating profit for the quarter of $13 million on $591 million in total net sales compared to a segment operating profit of $20.3 million on $590 million of net sales in the previous year’s comparable quarter. Income before minority interest and income taxes was $2.3 million for the quarter compared to $9.8 million the previous year’s comparable quarter.

As I mentioned before net sales were basically unchanged to $591 million from the comparable quarter of fiscal 2007 although there were changes in the business mix as of $20 million or 4% decline in staffing services was offset by gains of $8 and $10 million in the Telecommunications and Computer systems segment respectively.

For the quarter cost of sales increased by $6 million or 1% to $554 million, while SG&A decreased by 200,000 or eight tenth to the percent over the previous year to $21.5 million for the third quarter. Finally depreciation and amortization expenses increased by 800,000 or 8.4% to $10.1 million compared to the third quarter of 2007 but remained unchanged from the second quarter of 2008.

I would now like to turn the conference call over to Steven Shaw, President, Chief Executive officer of Volt Information Sciences for further explanation and his insights into the factors that affected the quarter and his review of operations and then he, Ron and I will be available to answer any questions you may have during the Q&A. Steve.

Steven Shaw

As Jack stated earlier the company reported net income of $4 million for the third quarter compared to $9.1 million in the comparable quarter for fiscal 2007. Segment operating profit was $13 million compared to $20.3 million for the third quarter of fiscal 2007. The decrease in segment operating profit was primarily the result of a $6 million negative variance in the Telecommunications services segment.

So, let’s start there with our segment discussions today. The Telecommunication services segment reported an operating loss of $5.1 million on $36.6 million of revenue compared to a 900,000 million operating profit on $28.3 million in revenue the previous year. The increase in the segments operating loss for the current quarter as compared to the comparable quarter of fiscal 2007 was due to increased overhead cost.

As previously reported in January 2008, the company learned that it may not be reimbursed for certain cost incurred under an installation contract and the operating loss for this quarter is primarily due to the same contract. The installation work on this contract is now substantially complete, but the increase in the quarterly overhead expense was primarily for additional cost required to substantially complete the work and to resolve open issues with the customer. The company continues to negotiate with the customer to be reimbursed for disputed billings under this contract.

Staffing services reported an operating profit of $12 million for the 2008 third quarter compared to an operating profit of $13.3 million in the comparable quarter of fiscal 2007. The technical placement division reported quarterly operating profit of $8.7 million compared to $10.5 million the previous year. 4% increases in both sales and gross margin dollars were more than offset by a 9% increase in divisional overhead expenses and cost related to new foreign operations and VMC projects.

The A&I division reported a quarterly operating profit of $3.3 million, a $0.5 million or 18% improvement over the 2007 third quarter despite a 6% decline in sales. The division’s increased operating profit for the current quarter was a result of an increase in gross margin percentage along with the reduction in overhead, selling and administrative cost. The increase in gross margin percentage was primarily due to 1.9 percentage point reduction in workers compensation cost as a percentage of direct labor resulting from improvement in claims experienced.

Although overhead cost of the A&I division were lower than the comparable quarter in fiscal 2007. They increased as a percentage of sales for the first time in the past five quarters due to the sales decline. The division continues to focus on reducing overhead cost to compensate for lower sales. In each of the past five quarters the divisions overhead dollars have declined from the comparable prior year quarter.

The Computer System segment reported a $7 million operating profit on $57.8 million in revenue for the third quarter compared to an operating profit of $6.9 million on $47.4 million in revenue the previous year, as the increase in sales and gross margin percentage were offset by the increase in overhead, selling and administrative depreciation and amortization expense, almost all of which was attributable to our acquisition of LSSi in the fourth quarter of last year.

Increases in Maintech’s IT maintenance sales and projects and other revenue were partially offset by a decreased in transaction revenue primarily from a major customer as it transitions from a transaction fee based model to a maintenance fee based model, and our Telephone Directory Segment including the results reclassified to discontinued operations contributed an operating profit of $3.7 million on $20.3 million of revenue for the third quarter.

As previously announced the company is selling the net assets of its directory systems and services and North American Publishing operations to yellow page group for net purchase price of approximately $178 million payable in cash at closing. The transaction includes most of the net assets of the telephone directory segment but excludes the Uruguay operations, which are now being included in a new printing segment. The transaction is expected to close shortly.

The company plans to initially use the proceeds estimated to be $110 million after taxes and transaction related expenses to reduce debt and for other general corporate purposes; and on that note, I would like to open up the conference to question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Josh Vogel - Sidoti & Company.

Josh Vogel - Sidoti & Company

My first question on the workers comp and the accruals there, can you remind us what was the benefit from the accrual reversal you took in Q4 of last year?

Steven Shaw

That’s between workers comp and the other insurance there; it was about $4 million.

Josh Vogel - Sidoti & Company

About $4 million, okay; so when you guys came into ’08 the accrual that you took this year was lower than when you took in ’07 due to the improvements in the workers comp claims. What was the accrual that you took in fiscal ’08 to start the year versus ’07?

Steven Shaw

This year on the A&I side it’s down about 0.5% on direct labor and on the technical side it’s up very slightly from last year.

Josh Vogel - Sidoti & Company

Okay and year-to-date workers comp claims are they down year-over-year?

Steven Shaw

They are down; the trend is still continuing.

Josh Vogel - Sidoti & Company

Okay so now barring any large and unforeseen claims over the next seven weeks, can you maybe give us a sense of the size of what type of accrual reversal you could take in Q4 of this year?

Steven Shaw

Its trends continue the way they are to be as good as last year.

Josh Vogel - Sidoti & Company

Okay so could be near $4 million?

Steven Shaw

Right.

Josh Vogel - Sidoti & Company

Now, the Tech Placement business, the division, it was a little bit lower than what I was looking for last quarter up modestly sequentially, but down year-over-year and I understand your operating in the tough economy, but is this decline maybe indicative of you guys losing market share or you attribute it entirely just to the weakening market demand?

Steven Shaw

I wouldn’t say it’s the weakening market demand. You’ll notice that our gross sales are higher than last year and we’ve also had to eliminate sales because we’re servicing a VMC operation through this staffing group.

Josh Vogel - Sidoti & Company

Okay. Now on the Tech Placement side, do you have any visibility into this business for Q4; how is it looking at year-over-year through August so far? Can you maybe give us a sense of if this business is going to be down again Q4?

Steven Shaw

We really don’t forecast that or we don’t give the amount.

Josh Vogel - Sidoti & Company

Can you give us just a sense of trends through the first five weeks of the quarter?

Steven Shaw

No, sorry Josh.

Josh Vogel - Sidoti & Company

Okay, now excluding the lowered worker’s comp claims, what else contributed to the higher margin percentage that you saw in the staffing in the last quarter? Are you seeing about a better bill pay structure?

Steven Shaw

We’re seeing reduced cost of delivering services, payroll taxes, pay bill, the markups that are fairly consistent with the prior year.

Josh Vogel - Sidoti & Company

Okay, what about bill rates in general? Do you have any leverage there or are clients taking to bill rate increases as we just increase?

Steven Shaw

It’s a very tight and very tough market out there.

Jack Egan

Plus there’s always leverage on you Josh, not the other way around.

Josh Vogel - Sidoti & Company

Right, what about on the wage side; are they increasing significantly?

Jack Egan

No. Not really.

Josh Vogel - Sidoti & Company

Now the contract dispute, first you talk about a potential recapture here and what do you think is the likelihood of recapturing some of that disputed work and can you maybe quantify from $0 million to $20 million. What you think that could be?

Jack Egan

Certainly somewhere between $0 million and $20 million; we think that we’ve owed most of that money and the customers going to be disagreeing and we don’t want it to lessen on negotiating stands by telling the market what we expect to get, but we do think we deal with a substantial portion of that money.

Josh Vogel - Sidoti & Company

So, the likelihood is high that you’re going to recapture at least a portion?

Jack Egan

We would expect that.

Josh Vogel - Sidoti & Company

Now on the non-disputed side, I just wanted you to clarify, that project is fully completed now?

Jack Egan

The installation work under that contract is done, but as you saw in the result for the quarter there is still a lot of overhead associate with going through all those jobs and documenting the work done, sitting down presenting it with the contract administrator, and the host of other people with the customer to try and strengthen our story.

Josh Vogel - Sidoti & Company

So now you booked a lot of these overhead charges last quarter; have you been paid yet on the non-disputed work and if not what’s the hold up there?

Steven Shaw

We are being paid as we speak.

Josh Vogel - Sidoti & Company

So, you do expect them to fully pay on the non-disputed side?

Steven Shaw

Yes.

Josh Vogel - Sidoti & Company

Okay, so now that this contract is complete and outside of any ongoing cost for the billings and collections administration side of the business, should we expect Telecom services to be profitable on a quarterly basis going forward?

Steven Shaw

Well, again we’re not going to forecast future results, but if we go back and just look at this quarter, without that contract and the cost associated with the overhead the division would have been profitable.

Josh Vogel - Sidoti & Company

Okay and just lastly now, with the stock offer it is today it’s at 11 and change; instead of maybe taking the proceeds from the telephone directory sale, how would you feel about share repurchases here?

Steven Shaw

We have a program in place that does authorize some share repurchase. We do have some covenants with the banks and some other lenders that limit that, but…

Josh Vogel - Sidoti & Company

I guess, what I’m getting at here is, the proceeds from the sale similar to the float of the entire company; I mean you can almost pretty much buyback the entire float here; is this an option? Maybe this is a better use of cash, if as opposed to paying down debt?

Jack Egan

We don’t really comment on the future activities within the organization, so I don’t think it’s appropriate for us to comment on that.

Josh Vogel - Sidoti & Company

Okay and I’m sorry Ron, what did you just say about the buyback program that’s in place right now?

Ron Kochman

Yes, we have authorization to buyback some shares subject to some financial covenants with the bank.

Operator

Your next question comes from Greg Hillman - First Wilshire Management.

Greg Hillman - First Wilshire Management

Yes, I was wondering first of all, how are you positioned in the marketplace for technical scientific staffing relative to CDI and how are you going to improve your positioning?

Jack Egan

Roger Ballou runs a very good company at CDI and as far as the breadth of his Scientific Placement organization I don’t have intimate details as far as how expansive or how far it’s penetrated into the scientific marketplace. We do have a scientific division, we do have opportunities and placements with scientific organization on a percentage basis of the organization; it’s not a substantial as our technical IT and engineering penetrations in the markets space that we have today, but scientific is a growing group for us there are greater opportunities and we do like that area of the business.

Greg Hillman - First Wilshire Management

Okay and then in terms of the just the type activity, I guess in staffing or also computer services, do you have a investment banker working for you in either of those areas?

Jack Egan

In what capacity?

Greg Hillman - First Wilshire Management

To help client’s acquisition targets.

Jack Egan

We do use an investment banker; we’ve made three acquisitions in the past, roughly two plus years; the Nortel acquisition, the Varetis acquisition and the LSSi. We use Morgan Joseph but there are many firms that come and talk to us all the time about opportunities in the market space. We evaluate each and every one of them as far as their synergies and potentials and so we’re constantly looking at the best interest of how to run the business to increase shareholder value.

Greg Hillman - First Wilshire Management

Okay and just the overall strategic, maybe you could talk about the divisions, after you’ve done the divesture of what was the synergy between the three or four divisions that you have?

Jack Egan

I think there is a lot of synergies within the division. The company has grown organically over the years and each of the subsidiaries primarily has been outgrowth of an opportunity or a synergy that related to a previous divisions. So, VMC is an outgrowth of the staffing. Secure Staff was an outgrowth of providing acquisition of human capital, which related to staffing.

Our delta division has infrastructure capability for delivering remote work and remote call center capability, which also has synergies for staffing. Our Maintech division today moving from copper wire to VoIP requires much more critical management of networks and infrastructure as well as mission critical maintenance of computers, which plays into infrastructure services. So, if you take a look at the breadth to the company we provide technology, human, capital and infrastructure services and those really enables us to provide a good solution to our clients among a cross section of critical needs to growth their businesses in the future.

Greg Hillman - First Wilshire Management

Okay, on what you’re just saying in terms of servicing our wireless carriers, can you talk about basically whether you think that’s going to be increasingly important for your company, your servicing wireless carriers in any capacity?

Jack Egan

Wireless capability is an industry segment that is growing across multiple, verticals within multiple industries, so I could just say yes, but it’s really a very broad question and I’ll have to sit down and break that down in much more detail. Of course we have a tremendous penetration into the telephony companies which are moving into wireless, we do a lot of business with large technology companies that are moving into wireless, so in our market segments in which we have a confidence and have market share the answer to that is yes, but it’s in various areas and various different solution that we’re providing to our clients today; even along the human capital as well as the technology and the infrastructure so it plays in every one of our major segments.

Operator

Your final question comes from Josh Vogel with Sidoti & Company.

Josh Vogel - Sidoti & Company

I am just curious what the run rate was on the printing business excluding what you sold in telephone directory, what the annual run rate was?

Steven Shaw

Let’s see for the nine months they did $9.3 million. We will have a bump in the fourth quarter, because they will be publishing the telephone directory.

Josh Vogel - Sidoti & Company

Okay, so it is a bit of a seasonal business.

Steven Shaw

Yes.

Josh Vogel - Sidoti & Company

So the printing business that is left, you posted operating losses this year and last but are you posting profits in the other quarters? Which quarters are you doing the distribution where you’re seeing positive results there?

Steven Shaw

It should be the fourth quarter.

Josh Vogel - Sidoti & Company

And just lastly I don’t know if you guys have this number handy, but do you have a backlog number in the telecom business for construction projects?

Steven Shaw

Yes, we do.

Jack Egan

The other question asked in the meantime, yes the backlog at the end of July was $63 million compare to $74 million at the end of the 2007 third quarter.

Operator

At this time I am showing no other questions.

Steven Shaw

If there are no other questions I want to thank you very much for joining us on our quarterly conference call and wish you all a very good day. Thank you very much.

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Source: Volt Information Sciences, Inc. F3Q08 (Qtr End 07/27/08) Earnings Call Transcript
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