Edited Transcript of STAF.OQ earnings conference call or presentation 12-May-20 1:30pm GMT

The key challenges facing the business in the second half of 2019 were primarily in the U.K. We lost a low-margin payrolling contract in July, which impacted us to the tune of GBP 1 million or $1.30 million per month across the July to December period. We faced the specter of the pending introduction of Brexit from December 31. While we were not hugely exposed directly to Brexit, we did have seen clients whose clients were affected. So the uncertainty leading up to it created a decision-making vacuum in certain parts of the U.K. economy.

Finally, we also faced the challenge of the pending introduction of a piece of tax legislation called IR35. We are pleased that this introduction was subsequently deferred for 12 months, but have forced the reshaping of some of our U.K. business to be more balanced towards permanent placement activity rather than temporary contracting.

We look at Q4, given the items just mentioned, it is more meaningful to look at the sequential movements that we are seeing. Q4 revenue was $63.8 million, a drop of $3.5 million or 5.2% from Q3, with gross profit moving to $11 million in Q4 from $12.5 million in Q3. Because of the holidays, Q4 is a quiet order for permanent placements. Our adjusted EBITDA in Q4 was $2.5 million against $2.9 million in the third quarter. Our press release contains a table showing the trailing 12 months performance.

I will now hand the call over to Sharnika Viswakula, our Corporate Controller and Principal Accounting Officer for a further update. Sharnika?

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Sharnika Viswakula, Staffing 360 Solutions, Inc. – Senior VP, Principal Financial Officer, Principal Accounting Officer & Corporate Controller [3]

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Thank you, Brendan, and good morning, everyone. For the full year fiscal 2019, revenue increased by 6.7% to $278.5 million as compared with $261 million for fiscal 2018. Of that growth, $47.2 million was from the acquisitions of Clement May and KRI. This was partially offset by a decline of $7.6 million from divesting of the PeopleSERVE business, $5.2 million from the unfavorable foreign currency translation and $16.7 million from organic revenue decline. Within organic revenue, temporary contractor revenue declined $16.8 million and permanent placement grew by approximately $0.5 million.

Gross profit for fiscal 2019 was $48.3 million, flat versus fiscal 2018 of $48.3 million, representing gross margins of 17.3% and 18.5% for each period, respectively. Operating expenses for fiscal 2019 were $47.6 million, an increase of 2.2% of the $46.6 million for fiscal 2018. The acquisitions of Clement May and KRI drove an additional increase of 5.7% in operating expense to sales ratio. Excluding the acquisitions, operating expenses decreased by 4.3%. Other expenses for fiscal 2019 were $5.8 million, a decreased of 28.1% from $8.1 million in fiscal 2018. The decrease was primarily driven by gain on the settlement of CBS Butler earnout of approximately $1 million and $0.8 million gain on the settlement of the firstPRO deferred consideration in fiscal 2019. This performance translated into a net loss of $4.9 million for fiscal 2019 as compared with $6.5 million loss for fiscal 2018, a decline of $1.6 million in net loss. EBITDA grew by 18.1% year-over-year to $6.6 million.

For the fourth quarter of 2019, revenue of $63.8 million declined 13.8% from prior year of $74.1 million. The decline stems from contractor revenue primarily due to a shift away from high revenue but low-margin clients in the U.K. that Brendan mentioned earlier. Our perm placement revenue has remained stable. Revenue during the quarter comprised of $61.5 million of temporary contractor revenue and $2.4 million of permanent placement revenue. The temporary contractor revenue is now approximately $4,700 per week, and we ended with approximately 5,000 billings from 3 contractors.

Gross profit for the quarter of $11.6 million was a slight decline from prior year fourth quarter of $12.3 million. Gross margin of 18.2% improved by approximately 150 basis points from $16.7 million in the prior year quarter, primarily due to a shift away from low gross margin clients. Operating expenses of $12.5 million was slightly higher than the prior year, primarily driven by the nonrecurring costs related to potential acquisitions and costs related to earnouts. Excluding nonrecurring and noncash cost, underlying operating expenses have declined by approximately $0.7 million. These operating results translated into a loss from operations of approximately $0.9 million.

Below operating income, net other expenses for the quarter were $1.7 million versus $2.6 million in the prior year. Interest expense and amortization of deferred financing costs remained relatively stable, and we had noncash on currency remeasurement gain of approximately $0.9 million from the strengthening of the pound sterling by year-end as compared with third quarter of 2019. This performance translated into a net loss of $2.5 million in the fourth quarter, a $1.4 million decline from prior year’s fourth quarter net loss. Although EBITDA declined 65.6% from prior year’s quarter to $0.7 million, we continued the trend of positive EBITDA for the eighth consecutive quarter.

I will now hand the call over to Alicia Barker, our Executive Vice President and Chief Operating Officer. Alicia?

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Alicia Barker, Staffing 360 Solutions, Inc. – COO & Director [4]

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Thank you, Sharnika. Thank you, Brendan. And thank you, everyone, for giving us some of your time today. We know these are stressful times with many of us working remotely and developing a new appreciation for teachers that they’ve always deserved. Unfortunately, we doubt that there are many of us on this call who have not somehow been impacted by COVID-19. All of us at Staffing 360 extend our deepest sympathies to you and your loved ones and our continued wishes for your good health.

The last time our Board of Directors met in person was February 25. We discussed our growing concern about the coronavirus and the potential impact to our business at that time. We issued our first guidance to all of our employees the first week of March. By the second week, guidance and communication had been issued to all of our contractors and clients. On March 11, the decision was made that our corporate headquarters in New York will operate remotely. And we quickly laid out a plan to shift the rest of the business in the U.K. and the U.S. remote. We conducted IT resiliency testing in our key locations and had executed guidance for our workforce to be fully remote well before the first lockdown or shelter-in-place orders were issued. We had Plan A, Plan B and Plan C for ensuring payroll for all of our contractors. And our professional business stream, that’s a relatively straightforward process. And our commercial business, with many low-income workers, who do not have technology or direct deposit, is anything but. With thanks to all of the support and service teams involved in our efforts, we’ve been very successful to date.

As Brendan mentioned, the safety of our staff and contractors is paramount to us, and this priority has resulted in high levels of productivity. I’m extremely proud of the work that our executive team has executed under Brendan’s stewardship. As a result of this priority that we have been so successful in maintaining our productivity levels as we went remote, we’ve overcommunicated from the start with daily all company communications and regular contractor and client communications. We have hosted multiple town hall calls with over 80% of our workforce in attendance.

To date, we’ve been extremely fortunate with the health of our staff in spite of almost 2 dozen of our internal Staffing 360 employees working with our clients and contractors on-site at our clients’ facilities. We employ thousands of essential workers across the United States and United Kingdom, keeping all of them as safe as possible has been a full-time job for all of us. We are proud and so fortunate that we have not lost even one employee or contractor in the battle against the virus.

Unfortunately, and out of necessity and responsible fiscal management, we also had to quickly execute a reduction in first — in force and furlough plan, which resulted in a net savings of $4.5 million across both geographies. We executed a plan to dramatically cut costs in other areas and have worked with our landlords in our key geographies to defer rent in an effort to preserve cash flow. At this point, we are now focused on our reopening plan, which will look different in different countries and states. Of course, we’ll look to health agencies and government for guidance. But our decisions as to when and how to reopen will be ours and ours alone. We will continue to be as careful now as we have been since the beginning of this pandemic. And I have full faith in our leadership and employees to carry out this plan with the same level of care, professionalism and detail that we did when executing our remote workforce.

I will now hand the call back to Brendan.

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [5]

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Thank you, Alicia. No earnings call in this environment would be complete without discussing some of the economic aspects of the coronavirus. From the beginning of April, we have participated in the employer payroll tax deferral program in the U.S. and are working on other stimulus programs available there, Paycheck Protection Program and the Main Street loan initiatives. In the U.K., we are taking advantage of the recently introduced furloughing policy of the U.K. government. And our U.K. banker, HSBC, and has been very proactive in ensuring continued liquidity for that part of our business. Will these stimulus programs be enough? Only time will tell.

In relation to trading, what we have seen in the early part of the year, is that we are gaining strong traction across late January and through to the middle of March. So our revenue for the first quarter, allowing for seasonal issues in commercial staffing, was about 10% down on Q4, with gross profit similarly affected. Overall, our first quarter was in line with where we expected it to be.

We have no reason to see the market in any different way to other staffing firms that have already opined upon it. 2020 will be a challenging year. Shelter in place and lockdown restrictions have made March and April difficult months, and this has continued into May. These restrictions have started to ease in certain states and in certain business sectors. Given that about 65% of our commercial staffing business is involved in food manufacturing or its related supply chain, we have had some economic protection that has not been enjoyed by many of our friends in the staffing industry. We do see some recovery based on discussions with clients about their needs and plans in the second half and a much stronger recovery in 2021.

In relation to refinancing and M&A, we have withdrawn from the actions we were taking until we can see the full or as much as possible, impact of the pandemic and potential recession coming from it. We still intend to refinance our balance sheet and we’ll work diligently towards that, but it will not be through the exercise in which we have spent the previous few quarters working.

Within markets such as this one, there are always opportunities for growth, and we’re also working diligently on these. There will be further updates on these over time. Thank you for giving us your time this morning. I wish you good health and safety.

Operator, at this point, I would like to hand the call over to you for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll take our first question from William Gregozeski with Greenridge Global.

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William R. Gregozeski, Greenridge Global LLC – Founder [2]

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Brendan, you mentioned having some protection with being in the food production industry and then obviously, you’re in IT and spaces like that. Can you give a sense for how much of a hit you guys took in March and April, and what you’re looking at now as far as — I mean, obviously, you mentioned other staffing companies were getting hit harder. Can you give us a sense of kind of what hit you’ve taken so far?

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [3]

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Sure. So to put it in a little bit of context, Bill, the commercial staffing business is roughly 50% of our total revenue, and 2/3 of that is in food manufacturing or supply chain. The next biggest part, about 40% of the business is in the U.K., which is all professional staffing. So what we’ve found on our professional staffing side is that most of our professional contractors can work from home. However, we have probably seen about a 25% decline across late March and into April. Despite that, and we’ve also been challenged in terms of permanent placement business, where the — a lot of the interviews are being done through conference calls and video calls, but most clients want the final interview to be in person. So there’s a lot of pent-up demand that we’re expected to see as soon as all of the various restrictions get lifted. In terms of general size, I mentioned on the call that our first quarter was about 10% lower than quarter 4. We will expect to see something in the order of a 15% to 20% decline further into the second quarter. So in relation to how the market itself is generally reacting, I think we’ve been pretty strong. We acted very quickly, but also we’re protected by the various diverse product range that we have, especially in the commercial staffing business. So will be down something in the order of 15% to 20% in the second quarter.

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William R. Gregozeski, Greenridge Global LLC – Founder [4]

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And that 15% to 20% is in comparison to which quarter?

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [5]

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Quarter 1.

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William R. Gregozeski, Greenridge Global LLC – Founder [6]

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Okay. All right. The $4.5 million cost cutting, is all of that going to be permanent? Or is some of that temporary until we get out of it?

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [7]

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So we hope that some of it’s temporary because some of it involves people who are furloughed. And the — our ability to bring people back from furlough will be driven specifically by the demand of our clients. Probably about at least 50% of it is absolutely permanent. The rest is dependent upon recovery. In addition to the $4.5 million, we’ve identified, a further $1 million of nonpeople-related costs that we have similarly taken as the business over the course of the last 4 to 5 weeks.

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William R. Gregozeski, Greenridge Global LLC – Founder [8]

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Okay. All right. And then you mentioned the M&A stuff and refinances on hold. Should I — should we expect then that the bridge you got from Jackson in August will probably remain outstanding until the other part comes due or you refinance the whole thing?

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [9]

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We’ll refinance the whole thing, but the bridge in December, I would expect that we are going to close that before the end of June, maybe will tickle into July.

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Operator [10]

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(Operator Instructions) And we’ll take our next question from [Paul Denby] with [Denby Enterprises].

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Unidentified Analyst, [11]

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Can you give us a little more color on the different programs that you’re applying for between the U.K. and the U.S. as far as these PPP programs and when you’ll know whether you’re going to receive any help from either one of these countries?

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [12]

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Okay. So I’ll start with the U.K. and move to the U.S. So in the U.K., the U.S. — the U.K. government introduced a furlough program, which furlough is not really a word that would have been particularly well understood or known in the U.K., but the British government has allowed companies to furlough employees and the government will pick up 80% of their salary costs up to a maximum of GBP 2,500 per month. So at the moment, we have 11 employees and 4 — 5 contractors who are currently on furlough. That furlough program is, as of this morning, has been extended through to the end of October. So there’s plenty of time in order to make sure that the demand is sufficient to bring those people back. In addition to that, there are VAT deferrals or sales tax deferrals that the government will allow us to defer the payment of the amount due, about GBP 700,000. In the summer, it will be deferred until the end of next March. Our bank, as I mentioned, HSBC, have been very proactive. And they have given us a GBP 1 million 3-year low interest loan to help us with the liquidity of the U.K. business over that period.

And then moving to the U.S., I mentioned we’re in the FICA deferral program, which is saving us about $100,000 per week from the beginning of April. We have applied for the Paycheck Protection Program, and we have been advised that we have an allocation of $10 million with the Small Business Administration. But we’re still working our way through the paperwork. I would think in timing-wise, we’ll obviously announce to the market as and when this happens, but it should happen across the course of the next 2 weeks. We have started to study the Main Street Lending Program, but as the rules have not really been established and it’s kind of like a bit fluid right now, we’re not sure exactly the extent to which we qualify and to the value to which we would qualify. But assuming we do, and we have great faith and belief that the way in which the various programs will be structured will allow a company of our size to take part. We would start using that program to refinance the Jackson Investment Group debt.

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Unidentified Analyst, [13]

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Okay. Sounds pretty promising.

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [14]

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Yes. It’s — we’re feeling very positive about it.

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Operator [15]

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And there are no further questions at this time. Mr. Flood, I’ll turn the call back to you for any additional or closing remarks.

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Brendan Flood, Staffing 360 Solutions, Inc. – Executive Chairman, President & CEO [16]

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Okay. Thank you again, Christine. The entire industry and the economies of our 2 main markets are working through unprecedented and challenging times. I am confident that we have been to the forefront of meeting those challenges. And time will tell whether the challenges will become greater or not. We are hoping for the best and as is our responsibility, planning for less favorable outcomes. I extend my thanks and appreciation for our talented and hard-working staff and management team whose actions are responsible for seeing us through the first phase of this storm.

I’d also like to commend the governments of both the U.S. and the U.K. with the stimulus activities that have been undertaken to date and those that may still come. Our industry is committed to getting people back to work as quickly as possible, and we will play our part in that. We look forward to continuing to drive improvements to our operational performance and to continuing to drive and maintain shareholder value as we progress on our path to build a profitable $500 million revenue company.

Thank you all, and we look forward to speaking with you again. Operator, that is the end of our call.

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Operator [17]

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This concludes today’s call. Thank you for your participation. You may now disconnect.