Staffing 360 Solutions' (STAF) CEO Matt Briand on Transition Period 2016 Earnings Conference Call Transcript

| About: Staffing 360 (STAF)

Staffing 360 Solutions, Inc. (NASDAQ:STAF)

Q1 2017 Earnings Conference Call

April 20, 2017 09:00 AM ET

Executives

Darren Minton - EVP

Brendan Flood - Executive Chairman

Matt Briand - President and CEO

David Faiman - CFO

Analysts

William Gregozeski - Greenridge Global

Bill Relyea - Midtown Partners

Operator

Greetings ladies and gentlemen, and welcome to the Staffing 360 Solutions Transition Period 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 your host Darren Minton, Executive Vice President of Staffing 360 Solutions. Thank you Mr. Minton, you may begin.

Darren Minton

Thank you Michelle and thank you to everyone who has joined us today for Staffing 360's transition period 2016 earnings conference call. I'm joined here today by Brendan Flood, Staffing 360's Executive Chairman; Matt Briand, President and Chief Executive Officer 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 is also available on Staffing 360's website; www.staffing360solutions.com.

And 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 US 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, April 20, 2017 and Staffing 360 Solutions expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call. During the comments, we may make references 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 measures.

Now with that, I'd like to turn the call over to Staffing 360's Executive Chairman, Brendan Flood. Brendan?

Brendan Flood

Thank you Darren, and good morning to everybody listening in the United States and good afternoon to those of you 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. Earlier this year, the Board at Staffing 360 Solutions took a decision to move our financial reporting calendar to a December year end. This decision was made for a number of reasons, but by far the most important was that our financial results could be compared more easily with other public staffing companies out there.

This makes decision making by our investment community both debt and equity more informed on where to place their investments. In financial statements filed last week, are the first we have filed on this new December year-end and we are very pleased with the outcome. The calendar year 2016 showed improvements across the board against equipment period in 2015. Revenue improved by 27%. Gross profit improved by 26%. Adjusted EBITDA improved by 88%. And our balance sheet strengthened and strengthened further post the end of the financial year. You'll hear more on these from both Matt and Dave, after you've heard from both Matt and Dave I would like to bring you up to speed on certain initiatives and where the company sees itself on its development curve.

At this point I will hand the call over to Matt Briand, our President and CEO for an update on our operational performance. Matt?

Matt Briand

Thank you Brendan and good day everyone. Before Dave goes into the financials, I will provide a few highlights of our operations as we continue to grow and implement our acquisition strategy. First, we are very pleased to report yet another period of double-digit growth. As Brendan has stated, we have seen revenue for the 12-month period ended December 2016 increasing by 27% year over year. With 183 million of revenue over the past 12 months, our historicals are now approaching our publicly stated forward looking run rate of $190 million. Part of this is fueled by the acquisition of The JM Group at the end of 2015.

As you may recall, The JM Group has been one of the UK's leading recruitment firms for over three decades, with a strong IT focus. And although our acquisition strategy is certainly feeling a sizable amount of our expansion, we're also delivering over 10% organic growth from our existing business units which is well ahead of the staffing industry's 3% in 2016. This growth is combined with our efforts to maximize efficiencies, including the proactive campaign we discussed on our last conference call, where we have worked over the past three years to reduce our workers' compensation claims that is 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 it creates economies of scale. We're also enacting various initiatives to boost sales and further motivate our workforce. For instance, in the UK, our top recruiters will be participating in several business development events across the next few months including an event hosted by our Independent Director, Jeff Grout who is a sought after motivational business speaker in London and formally the UK Managing Director of Robert Half.

In addition, we are deploying programs like Monroe Staffing's workforce management solution, managing large contingent workforces upwards of over 100 temporary associates within specific clients. We are currently operating a handful of such large solutions and recently signed two additional agreements that should kick-off in the early summer. We can't disclose the clients' names due to confidentiality agreements, but one is in the Northeast and the other is in the Charlotte, North Carolina market.

We've also signed several recent agreements within our professional services divisions, one with a major entertainment company and the other with a large defense contractor. Lastly, we are also instituting a companywide cross selling program that is already starting to make progress. We hope to make additional sales leads from these initiatives in the months and quarters ahead. In summary, we have announced another period with double-digit growth year-over-year including 10% organic growth and our employees have done a fantastic job growing the business and realizing efficiencies and we thank them for their strong work ethic and dedication.

I will hand the call over to David Faiman, our Chief Financial Officer for the financials. Dave?

David Faiman

Thank you Matt and good morning everyone. We have a significant amount to discuss. Starting with the calendar 12 months ended December 31, 2016, Staffing 360 generated revenue of 183.5 million, a 27.1% increase over the comparable 12 months of 144.4 million. Included in that growth is 10.5% of strong organic growth, 17.1% from the acquisition of Lighthouse Placement Services and The JM Group, slightly offset by 0.5% of unfavorable currency translation from the weakening of the pound sterling.

For the 12 months of 2016, gross profit of 31.9 million grew 26.1% very much in line with revenue. Our operating expenses of 35 million, grew 4.2 million or 13.6%, primarily from the acquisitions I mentioned earlier, partially offset by lower professional fees and non-cash compensation expenses. While higher in absolute dollars, as a percentage of revenue, our operating expenses improved 220 basis points as we continue to realize scale and operating efficiency. The result of this performance was a loss from operations of only 3.1 million versus 5.5 million in the comparable period, an improvement of 2.4 million or 43.7%.

Other expenses increased 1.1 million, mainly from higher interest on higher average debt during the period and amortization of deferred financing costs associated with such debt. This resulted in a net loss of the period of 7.9 million, a decrease of 1.1 million or 12.8%. Finally, adjusted EBITDA for the 12 months grew to 5 million compared with 2.7 million for the comparable period, an 87.7% improvement. Turning now to transition period June 1 through December 31, 2016, revenue of 109.4 million was 19.7% higher than the comparable period of 91.4 million. Of that growth 11.1% was derived organically, 9.2% from the acquisition of Lighthouse Placement Services and The JM group, partially offset by 0.6% from unfavorable foreign currency translation.

Gross profit expanded 17.3% from 16.3 million to 19.1 million, driven primarily by overall revenue growth. While gross margin contracted a bit from 17.8% to 17.5% on mix of business. Overall, operating expenses increased from 18.4 million to 19.8 million, but improved as a percentage of revenue by 210 basis points from 20.2% to 18.1%. Again, operating efficiencies and lower professional fees were contributing factors. This performance translated into a substantial improvement in our loss from operations, which was 629,000 for the transition period compared with 2.1 million for the comparable period in the prior year. Other expenses were almost unchanged at 3 million resulting in a net loss of 3.6 million, a 30.9% improvement from the prior period net loss of 5.2 million. Finally for the transition period, adjusted EBITDA was 3.3 million, a 38% improvement over the prior period of 2.4 million.

Turning now to the balance sheet, our working capital deficit improved by 1.5 million, including approximately 900,000 increase in our accounts receivable financing lines of credit, which moves with the growth in business. Excluding the AR lines, working capital was approximately 500,000 positive compared to a deficit of 1.8 million as of May 31, 2016. With respect to other financing, our gross debt of 9 million is lower by 3 million since May 31, 2016.

Applying the trailing 12 month adjusted EBITDA of 5 million, our leverage ratio defined as total long-term debt, gross of debt discounts plus earnouts plus assets held for long-term obligation and divided by adjusted EBITDA improved to 2 times from 6.2 times for the comparable prior period in 2015. Subsequent to December 31, 2016, the company has closed 9 million of financing from Jackson Investment Group LLC. The majority of which was used to retire debt coming due and to redeem the Series D preferred shares.

The loan from Jackson Investment Group had no principal amortization during its term and the coupon of 6% is also not payable during the term and half of which may be converted into common stock in maturity at a conversion price of $1.50. Finally, turning to cash flow, cash flow used by operating activities during the transition period was 1.2 million reflecting the growth in revenue towards the end of the period. As we pointed out in the past however, as much of the company's operations are funded from its AR lines of credit, which is typical to staffing companies, it's important also look at the movement in that line during the period. Funding from the AR lines was 1.7 million.

At this point, I'll hand the call back to Brendan before we open for Q&A.

Brendan Flood

Thank you, Dave. Firstly, let me turn to the 800-pound gorilla, which is our stock price and its performance over the past number of quarters. It is the Company's desire and intention to deliver long-term value to our shareholders. At this point, we have not made an acquisition since we acquired The JM Group in the UK in November, 2015. Following that acquisition we decided as a Board and as an Executive Management team that it was more important to correct the financial and operational fundamentals of the company and then to allow the market to catch up with those initiatives and to bring the valuation of the stock and the company to a more realistic level. Between December 2015 and December 2016, we have improved our balance sheet to the point where our leverage ratio, excluding receivables based debt, has dropped from 6.2 times adjusted EBITDA to 2 times adjusted EBITDA as Dave has mentioned. For many potential investors in the company, the amount of debt overhang that we have had and more importantly its short term nature created a major question mark over the company. We have materially addressed that over the period outlined and as Dave further outlined, even since the end of December, we have continued to strengthen the balance sheet with a new 9 million of debt on more favorable terms than prior financings.

The liquidity of our stock has been little short of exceptional over the past few quarters. We trade on average over 2% of the issued capital of the company every single day. We've had days where 20% of the company has traded and even weeks where up to 100% of the equivalent of the total number of shares in issue have traded. As mentioned in my recent letter to employees and shareholders, we have started a non-deal roadshow where we are meeting with institutional investors to encourage them to move into the stock with the intention to hold it to counter the perception of transience in our shareholder base. We are very early in this program and we will update you on future calls.

On March 23, the company received an offer to acquire all of the outstanding shares of the company for $1.10 per share. The board reviewed the offer, which was a 120% premium to the share price at that point and determined that it was not in the best interests of the company or the shareholders to accept that offer, so we gracefully declined it. The relationship with the offering party, Jackson Investment Group continues to be strong and despite the rejection, there was a further investment by Jackson Investment Group in the company post rejection. There is an analyst report in circulation from Greenridge Global that outlines a valuation of $3 for our stock. As a public company, we don't issue valuation guidance, but we do believe that the company is currently undervalued and that we will continue to drive initiatives to return value to our shareholders.

In relation to our M&A program, we have started to crank it up again and have identified a number of targets with which we have already entered discussions. That said, we will never give details on any individual transaction until a transaction has been completed as there is never a guarantee that a transaction will actually complete. I can assure you however that our stated aim of $300 million of annualized revenues has not been forgotten and that we fully intend to deliver on this.

Following the annual shareholder meeting in January, there was one proposal that did not gain sufficient votes to go through and that was our migration from being a Nevada Corporation to being a Delaware corporation. We received very few votes against it, but it required more than 50% of the issued share capital to vote in favor of it. This migration is important to us for a number of reasons, not least of which is the continuing process of making the visibility of our business greater for investors, but also it will reduce our overhead and not having to continuously spend dollars on Nevada legal fees every time that we perform a financial transaction.

Since the year end, the investment from Jackson Investment Group also required shareholder approval. For those of you who are shareholders, you will receive information in the near term about a special shareholders meeting to be held on June 15, 2017 and we would encourage all shareholders to take the opportunity to vote.

Finally, yesterday, we held a quarterly review of performance with all of our operational leadership and I can share with you that each and every member of the leadership team is enthused about their individual operations and as a whole comes together. We are scheduled to deliver our first quarter's results, the quarter ended March 2017 under our new timetable by the middle of May, which is just a few weeks away.

I want to end by complementing our leadership team and each of their teams for everything that they do on a daily basis. Congratulations to each and every one of you. Operator, at this point, I would like to hand the call over to Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of William Gregozeski with Greenridge Global. Please proceed with your question.

William Gregozeski

Hi, guys. Congratulations on reshaping the balance sheet and the continued outperformance of the staffing industry in terms of your growth. In terms of the M&A deals you guys are looking at now that you're reengaging in that, how are they looking relative to what you guys have purchased in the past. Are you still looking at the same kind of mix of debt and stock to buy these or I mean is there any information you can give us on that front?

Brendan Flood

Thanks, Bill. This is Brendan. So the first point I would make is that in terms of the types of companies that we are looking, at we still hold rigidly to our five strategic pillars. So we're only looking at staffing businesses within light industrial, engineering, information technology, accounting and finance and administration. We're not looking at anything outside of that. We're not looking at anything outside of the United States and United Kingdom.

In terms of the structure of the deals, each deal ultimately ends up being an individual transaction. Right now, we believe that our stock, as I mentioned earlier, is sufficiently undervalued that we don't want to use it as a material part of a transaction right now, because for a very little piece of the purchase consideration, we could end up giving away an awful lot of stock and diluting the existing shareholders. So that's about as much as I can tell you. As we close each transaction, there will be a lot more information coming from it. But each and every transaction that we do, we try to determine what is the best financial makeup that makes the best return for our shareholders.

William Gregozeski

Okay. And how, if at all, is Jackson involved in the M&A, I mean, either finding targets for you or being there to support the need for additional capital if that's the case?

Brendan Flood

At this point, Bill, I'm not really at liberty to tell you exactly where our capital is going to come from. I will tell you, as our largest shareholder, that Jackson Investment Group has been very supportive of the management team, very supportive of our strategy and is a great sounding board and mentor if and when we need it. But I think having somebody like Jackson Investment Group as our largest shareholder is a great bonus for the organization and a great show of faith that somebody who's such an industry veteran has faith in the management team of Staffing 360.

William Gregozeski

Okay. And last question is, given the money you've received from them, about a week ago, you guys took like a small - quite high interest short term note. I mean, when will those kind of short term high interest things kind of are the thing of the past for the company.

Brendan Flood

Very soon.

Operator

[Operator Instructions] Our next question comes from the line of Bill Relyea with Midtown Partners. Please proceed with your questions.

Bill Relyea

Good morning. As we have a new administration and a lot of changes, have you seen any significant changes either in economic factors that affect the staffing business or competitive issues that have changed this year so far?

Matt Briand

Hi, bill. This is Matt. The simple answer to your question is, no, not yet. We weren't sure what was going to happen depending on the vote with the Affordable Care Act and how that would that impact the industry, but seem that that has died out for the time being. There hasn't been any real kick up on the economy or any other competitive advantages as of yet.

Bill Relyea

Okay. Thank you.

Brendan Flood

Bill, this is Brendan. If I can add a little bit in terms of the other side of the pond and the whole Brexit situation as well. It's going to take several years before Brexit really works at, what Brexit is going to look like. And despite an initial degree of uncertainty, most of our clients have just basically got back to doing work. So we're not seeing any major downside other than like the world doesn't like uncertainty. But our UK businesses are performing better than probably ever before.

Operator

Thank you. [Operator Instructions] That marks the end of our question-and-answer session. Does anyone from the team have any closing remarks?

Brendan Flood

Okay. Thank you, Michele. As you've heard in this call, there is an awful lot happening within the company and also outside of the company. You have heard me say it many times, but as a management team, 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.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a nice day.

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