Earnings Call: Q2 2021

Aug 17, 2021

Greetings to all, and welcome to the Staffing 360 Solutions Fiscal Q2 20 21 Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this call is being recorded. This conference call will contain forward looking statements within the meaning of the U. S. Federal Securities Laws concerning Staffing 360 Solutions Incorporated. The 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 Solutions actual results to differ from those contained in our forward looking statements. All forward looking statements are made as of today, August 17, 2021, and Staffing 360 Solutions expressly disclaims Any obligation to revise or to update any forward looking statements after the date of this conference call. During these prepared comments, the company may make reference to certain non GAAP measurements such as adjusted EBITDA where applicable. We have provided reconciliations of these non GAAP measurements to the most directly comparable GAAP Measure. It is now my pleasure to introduce Brendan Flood, Chairman, President and Chief Executive Officer of Staffing 360 Solutions. Mr. Flood, you may begin. Thank you, operator, and thank you to everyone who has joined us for Staffing 360's I'm joined today by Kala Danwar, our Principal Accounting and Principal Financial Officer. I'm pleased to speak with you today about the solid progress that we have made and the improved results we have delivered in the Q2. I am optimistic about the vast and growing pipeline of opportunities in the staffing business and also about the progress being made in COVID-nineteen vaccination efforts in the United States and the United Kingdom. I will continue to stress that the well-being of our staff, contractors and clients continues to be a vital and key priority. We will discuss this in a little bit more detail later in the call. The format of our call today will begin with my overview of our improved quarterly results and then Khalid will provide more detail on the financials. Next, I'll discuss how we continue to make excellent progress through the pandemic and I'll add more color about our 1 quarter and our optimistic view of the business outlook. The line will then be open for your questions. Today Staffing 360 Solutions operates our 7 brands with 14 U. S. And 2 U. K. Branches. In each of our 5 verticals, we are seeing promising and positive indications, while industry trends continue to improve. As outlined in yesterday's press release, revenue for Q2 2021 grew to $50,500,000 with gross profit up to $9,000,000 Excluding FirstPRO, which was disposed of in September 2020, revenue growth was 23% year on year and gross profit showed a markedly improved 37% uplift. We also recorded sequential quarterly growth On a year to date basis, we are within just a couple of percentage points from returning to 20 twenty's revenue and gross profit. Excluding the disposed business, year to date we are up 3.3% in revenue and 10.3% in gross profit. Our adjusted EBITDA for Q2 was $1,400,000 which was up 160% on the prior year and growth of 21% from Q1 2021. On a non adjusted basis, we delivered EBITDA of $9,700,000 Having received forgiveness of the first $10,000,000 of Paycheck Protection loans totaling $19,400,000 In the Q2, we recorded a 239,000 COVID related bad debt in our U. S. Business on the last day of the quarter. As a result of our strengthened balance sheet, interest burden has been reduced from 50% by 50% from where it was a year ago, which has led to $7,800,000 in net income for the 2nd quarter against a net loss in 2020 of 3,800,000 I'm pleased to report that as of last week, we have reduced our non receivables debt and redeemable preference shares from approximately $72,300,000 in June 2020 to $13,500,000 now. Year to date, we have positive net income of $6,200,000 against the prior year loss of $10,800,000 an improvement of $17,000,000 We continue to sell new business through the quarter in both the U. S. And the UK and our numbers are showing important progress. The deeper step change progress is expected in early September when the U. S. Stimulus unemployment check program ends. The unemployment stimulus has adversely impacted the growth of our commercial staffing business And we are competing to attract workers against the U. S. Stimulus program, which is a challenge. We are successfully rising to that challenge. Overall, we are pleased with the outcome of this quarter. And with that, I will hand the call over to Khalid Anwar, our Principal Financial and Accounting Officer, for a further financial update. Khalid? Thank you, Brandon, and good morning, everyone. For the Q2 of 2021, revenues of $50,500,000 reflect an increase of 16.5% over the prior year of $43,400,000 Excluding the divested business, 1st Pro, Revenues increased by 22.9%. The increase included favorable foreign currency translation of 2,100,000 The remaining increase was due to organic growth in the businesses in the U. S. And UK by 7,300,000 offset by divested business of $2,200,000 Revenue during the quarter was comprised of $49,200,000 of temporary contract revenue and $1,300,000 of permanent placement revenue. The temporary contractor revenue is now running at approximately $3,800 per week after adjusting for the divestiture business. That number is up by more than 22% from approximately $3,100 per week in the prior year Q2. Country worker revenue is also up from approximately $3,700 per week in the Q1 of this year. We ended the quarter with approximately 3,500 temporary workers and there has been an overall uptick in utilization. Gross profit for the quarter of $9,000,000 increased by $1,500,000 or 19.4 percent over the competitive Q2 of the prior year. Excluding the divested business, gross profit increased by $2,400,000 or 36.8 percent. Gross margin for the quarter was 17.8% compared with 17.4% in the prior year Q2. Excluding the divested business, gross margin for Q2 2020 was 16%. Operating expenses for the quarter were $10,100,000 an increase of 12.3% or $1,100,000 from the same time last year. Excluding the divested business, Operating expenses were higher from last year by $2,300,000 The increase was driven by higher commissions due to the growth in business, Bad debt expense on a customer that filed for bankruptcy, adjustment of accounting fees between Q1 and Q2, Year to date is in line. Legal costs related to setting up the company for S1 and S3 filings, Other consulting costs, higher insurance costs, partially offset by overall reduction in general and administrative costs. Loss from operations narrowed to $1,100,000 versus a loss of $1,500,000 in the prior year. Excluding divested business, prior year loss was 1,300,000 Other income of $8,900,000 includes the 100 percent forgiveness of $10,000,000 of PPP loan from Monroe Staffing Services, plus accrued interest of $91,000 Interest expense of $1,200,000 is favorable to last year by about $927,000 helped by the company's successful efforts to reduce its debt load over the last several months. As you know, these efforts have continued into the Q3. This quarterly Performance translated into $7,800,000 of net income versus a loss of $3,800,000 last year. EBITDA of $9,700,000 improved significantly from a loss of $845,000 or a loss of $649,000 excluding the divestiture business. Adjusted EBITDA $1,400,000 was higher by $842,000 from Q2 last year, an increase of 160%. Year to date adjusted EBITDA of $2,500,000 was favorable to last year by $768,000 an increase of 44%. Finally, more positive news in the 3rd quarter. We previously shared that SBA gave us formal notice that the remaining PTP loan of $9,400,000 have been Fully forgiven. The company sold shares in the market raising an additional $11,200,000 and importantly paid down $8,300,000 in debt after transaction fees and working capital needs. Since December 2020, The company has now raised more than $40,000,000 via stock offering and has reduced its total debt and redeemable Reference shares by $58,800,000 As a result, on a year to date basis, the company eliminated $2,100,000 in interest expense. I will now turn the call back to Brendan. Thank you. Thank you, Khaled. The pandemic has forced us all to adapt and to challenge the way we evaluate our business models. I'm pleased to note that the recovery is most certainly underway as evidenced by the recent encouraging jobs reports issued by the U. S. Bureau of Labor Statistics. Every month this year has shown positive growth in non farm labor. As reported in The Wall Street Journal, the delta variant of COVID-nineteen isn't expected to dent to robust U. S. Recovery. However, nobody can predict the future. We are cautiously optimistic as we continue to closely monitor the situation. There are literally millions of job vacancies created as the pandemic eases. We continue to expect that pent up demand for staffing will accelerate growth and we could very well see the next year or 2 as the biggest years in the staffing history. As I mentioned on the last quarter's call, we see the same similarities in the staffing market recovery and And we reiterate our previous comments that our industry and Staffing 360 Solutions are now expected to be in a continuing growth period with a strong recovery expected in the second half of twenty twenty one lasting well into 2022. One major difference between this downturn and those that have gone before Is there strong recovery this time in permanent placement or direct hire over temporary contracting? Excluding the disposed business, our permanent placement gross profit was up 52% year on year in Q2 and we expect at least that same level of growth in Q3. Not quite the middle of Q3 and we've already generated more permanent placement This quarter than we did in all of Q3 last year. And I point out that permanent placement is a higher gross margin business. Temporary or contract staffing has been a little slower to recover And this should certainly change with the ending of the stimulus program in early September as previously mentioned. Calat has already said that recently all 3 of our remaining PPP loans totaling $9,400,000 have now been fully forgiven and will be accounted for in our Q3 results. The second half of twenty twenty delivered $2,500,000 of revenue or $100,500,000 excluding the sale of FirstPRO, with gross profit of $15,800,000 excluding the disposal. While not issuing specific guidance, We do expect to significantly beat both of those revenue and gross profit numbers in the second half of the current year. In summary, Staffing 360 Solutions continues to benefit from top line growth, resulting of our swift and strong reorganization at the onset of the pandemic, plus the economic recovery and lower overall spending by the company. I'm pleased to talk about some of our business wins. We continue to sign up approximately 12 new customers per month within our Commercial Staffing business, bringing us to nearly 100 new contracts since the beginning of the year. Our largest U. K. Client is progressing through the legal documentation for a new 2 year extension to our framework agreement And importantly, has also awarded us the exclusive managed service provider position on all of its IT recruitment globally. This program started in July and will continue for at least 2 years. A large UK client continues to drive its growth with our support in the UK, Poland and the U. S. And our largest client of professional staffing in the U. S. Has asked us to extend our reach into 3 additional states and is now looking at additional opportunities for us to collaborate more broadly. I look forward to talking more about that in our Q3 call. In the U. S, we are certainly seeing a candidate driven market, especially while the stimulus check program continues. A large portion of our client relationship management is geared around educating clients on required pay rates, So they are not competing even with McDonald's, which is providing pay rates of $17 per hour in Massachusetts. While business has been good and improving, our internal corporate focus has simultaneously been on refinancing our balance sheet and to continue looking at the safety of our employees, their families and our contractors. In line with many companies across United States, we recently adopted a workplace safety policy, which mandates that all of our internal employees be fully vaccinated against COVID-nineteen unless they request and receive Reasonable accommodation for medical or religious exemption. In order to meet the growing demands of our business And to control what we can to avoid interruptions in productivity and office closings, we believe that this was a necessary step and one that follows the ongoing scientific advice. Each week, a growing number of companies and local entities are taking a similar position. I would like to thank all of our internal employees who support this decision. Many people have asked why we have executed on a number of capital raises in the past 8 months. The simple answer is that the funds have been available and that securing our financial future has been one of the core issues that we have been dealing with for several years. There is no certainty that this access to capital will last, but this period allowed us to take a huge cash flow burden off our shoulders, which will be instrumental in allowing us to invest further in our operations that we can more readily exploit the improving market that we are seeing. We had to execute on a reverse stock split to make this happen and also to ensure that we maintained our NASDAQ listing, which is a core requirement in our raising of capital. Will there be a need for further raises? Most likely there will be. But I would expect it to be linked to either directly or indirectly and for the benefit of our acquisition program. Right now, dollars 13,500,000 of non receivables debt is very manageable and is not a drain on our operating cash flow, but does place some restrictions on our operating and M and A decisions. That said, we can look forward with some degree of confidence that We can execute on a strong plan for the benefit of our shareholders. As a result of the material fiscal improvements discussed and as previously noted, We will begin to refocus on M and A in the second half of the year, which is now upon us. Deal flow continues to be strong and we're optimistic that we can still see attractive multiples for valuation. We believe that even though M and A deal flow is high and there is competition for growth, The fragmented nature of the staffing market allows for accretive and attractively priced acquisitions to be found. With all of that said, I'd like to thank you for your time and attention this morning. I wish you good health and safety. Operator, I would like to hand the call over to you for our Q and A Thank you. We will now conduct a question and answer session. It may be necessary to pick up the handset before pressing the star keys. One moment please while we poll for questions. And we'll now take our first question. It comes from Peter Knitz, Hub investor, please go ahead. Hey, great job on your Q2 progress and delivering on your business plan. My question is, is cross selling still strong? And can you tell us about how it's going? Thank you. So there's a couple of things about cross selling, I would say. Firstly, is that I've never worked in the business where cross selling is deemed to be the solution to world hunger. But what we do with it is to make sure that our Operations can work significantly more collaboratively with each other and that they can go ahead and sell our services with multiple products And with a greater degree of confidence than that might have been done alone. We do have a number of instances. As I said, one of our largest UK clients is operating both through the JM Longbridge Group in the U. K. And Lighthouse Professional Services in the U. S. And as a consequence of that, we've already made 10 permanent placements through Lighthouse Professional Services that they wouldn't have made otherwise. Clement May in the U. K. With its largest British American Tobacco operates regularly with the J. M. Longbridge Group. It operates with CBS Butler in the UK. And it is starting to operate with Monroe Staffing Services in the U. S. Last week, we decided on a communication program with our clients in North Carolina, so that they would look upon us less as just a temporary staffing business. So Richard Wilbourne, who is the Director of that area sent a communication to all clients of Key Resources and Monroe Staffing to explain how they can work So It is becoming more and more of a thing and it's becoming more and more of a attractive contribution to our P and L account. But the biggest thing that we'll actually bring is to bring all of our organizations together and get them to work significantly more collaboratively than they ever worked before the pandemic. My expectation is that as we start to roll out some of these services more broadly, I mean our commercial staffing business in the U. S, we have Never historically been very big on Direct Hire. Some of this communication program will probably bring us from $300,000 to $400,000 of Direct Hire Gross profit per annum up to something more in the order of $1,500,000,000 plus next year and beyond. So there are great opportunities for us, but The bigger opportunity is to allow our salespeople to grab more confidently and sell a larger proposition to our clients than they might otherwise been able to do. Hopefully, that answers your question. Yes. Thank you. Now I'd like to turn the call back to Brendan Flood for a brief closing comment. Thank you, operator. I'd like to believe that resiliency is a team sport. And once again, I commend our talented staff and the management team for continuing to successfully navigate the new normal with integrity and purpose in these less than ideal conditions. As I've noted before, since the dawn of the pandemic, We all now work smarter and more efficiently. Our improved financial condition, strategic efforts, operational efficiencies, Enhanced ability to execute and the long term market opportunities in front of us are all driving momentum. The speed with which the vaccination programs are rolling out in our 2 main markets provides us with the confidence to continue to believe We anticipate that we will keep on driving improvements to our operational performance and to continue to drive and maintain shareholder value as we progress in our path toward our goal to build a profitable $500,000,000 revenue company. Thank you all. I wish you continued good health I look forward to speaking with you again to discuss what we anticipate will be a further improved Q3 results. Operator, that is the end of our call. Thank you. Everyone, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.