Exela Technologies, Inc. (NASDAQ:XELA) Q1 2020 Earnings Conference Call June 30, 2020 5:00 PM ET
William Maina – IR
Ronald Cogburn – CEO
Shrikant Sortur – CFO
Conference Call Participants
Trent Porter – Nuveen
Bryan King – Congruent
Allen Kato – Beach Point Capital
Jerry Wang – Carlyle
Good day and welcome to the Exela Technologies First Quarter 2020 Financial Results Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Will Maina, Investor Relations. Please go ahead.
Thank you, Sean. Good afternoon, everyone and welcome to the Exela Technologies first quarter 2020 conference call. I’m joined here by Ron Cogburn, Exela’s Chief Executive Officer; and Shrikant Sortur, our Chief Financial Officer. Following the prepared remarks made by Ron and Shrikant will take your questions. Today’s conference call is being broadcast live via webcast, which is available on the Investor Relations page of Exela’s website at exela.com. A replay of this call will be available until July 7, 2020. Information to access the replay is listed on today’s press release, which is also available on the Investor Relations page of Exela’s website.
During today’s call, Exela will make certain statements regarding future events and financial performance that may be characterized as forward-looking statements under Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties and are based on current expectations and assumptions. We undertake no obligation to update any statements to reflect the events that occur after this call, and actual results could differ materially from any forward-looking statements. For more information, please refer to the risk factors discussed in Exela’s most recent filed periodic report on Form 10-K, along with the Associated Press Release and the company’s other filings with the SEC. Copies are available from the SEC or the Investor Relations page of Exela’s website.
During today’s call, we will refer to certain non-GAAP financial measures. We believe these non-GAAP financial measures provide additional information on how management views the operating performance of our business. Reconciliations between GAAP and non-GAAP results we discuss today can be found in the Investor Relations page of our website. Please note the presentation that accompanies this conference call and investor fact sheet are also accessible on the Investor Relations page of our website.
I would now like to turn the call over to our CEO, Ron Cogburn. Ron?
Good afternoon and thanks everyone for joining us today.
I’m pleased to announce that we filed our Form 10-Q for the three months ended March 31, 2020 last evening. We are now current on all of our reporting requirements to the SEC and under our debt agreements, and we expect to be a timely failure going forward. I want to thank our finance and legal teams for all their hard work in completing this process.
I will begin with an overview of our first quarter 2020 results, business highlights and current trends. I’ll then turn the call over to Shrikant Sortur for more detailed review of our Q1 performance and to discuss our second quarter and 2020 outlook. After Shrikant’s presentation I will come back and talk about our priorities for 2020 and some recent business updates, including our response to COVID-19 pandemic.
Now let’s turn to Slide number 6. Our first quarter 2020 total revenue on a constant currency basis was $367.2 million, down 9% year-over-year, but above our expectations. We generated $44.4 million of adjusted EBITDA on a constant currency basis in Q1.
Our adjusted EBITDA margin was 15% when excluding pass-through and low margin customer exit revenue. And, we ended Q1 with $97 million of global liquidity, which has increased to $106 million by the end of the second quarter.
Our first quarter revenue performance, mainly reflects our exit from certain customer contracts and statements of work, which are not strategic to the fit for Exela’s vision. You may recall that we discussed this strategy on our June 9 call as well.
However, I would like to provide you or detail today as it is an important part of our ongoing business transformation that will continue to impact our results in the near term and will enable us to achieve our strategy of improved operating income and free cash flow performance over the long term.
As we discussed on our Q4 call, our focus for 2020 and beyond is to continue to drive growth in our base business by expanding with our existing customers, especially among our Top 200 within our BFSI, Healthcare customer portfolios as well as winning new customer logos. At the same time, we are aligning ourselves away from unpredictable non-recurring revenue that is unlikely to achieve our long-term margin targets.
During 2020, we will continue to exit certain contracts and statements of work with little or no margin contribution and no opportunity to improve their contribution through digital transformation and automation. We refer to revenues from these contracts as transition revenue. As of January 1, we had approximately $150 million of annual transition revenue that we will exit over the course of this year and as such, we will continue to absorb this transition in our top line growth metrics.
However, it’s important to note that declining transition revenue is also expected to have a positive impact on our gross margin profile. We have a plan in place and we are working diligently to rebalance our resources, debt cost, and optimize our business for a reduction in these low margin revenues this year.
We will continue to provide you with updates and supplemental information on the impact on our results by transition revenue in future calls. Our base business is where we are focused for growth, which represents what we believe is a very strong foundation for improved future performance. We believe our base business will be the best indicator of our success and our growth potential going forward.
Now moving to some recent business and market trends. From a volume perspective, based on our current visibility, we expect the impact of COVID-19 on customer volumes to be the most significant in the second quarter of 2020 before showing improvement in the second half of the year as conditions begin to normalize.
For the second quarter, we expect total revenue to be between $300 million and $305 million, reflecting a negative $35 million to $40 million impact from COVID-19. As part of our operational improvement efforts, we reduced our headcount by approximately 4% year-over-year or 920 FTEs in the first quarter, and in response to the current slowdown, we reduced the active workforce by another 3,000 FTEs in the second quarter.
Looking to the second half of 2020, we will continue to carefully balance our cost base against our expectation for increased volumes as well as the exit of our transition revenue. Overall, we anticipate the volume improvement combined with our cost initiatives will lead to improved gross margin performance in the second half of 2020.
From a new opportunities perspective, the realities of COVID-19 are leading our customers to increasingly explore business process automation initiatives that enable them to reduce costs and operate effectively in a new normal. This trend is having a positive effect on our new business wins showing strong growth so far this year.
On a year-to-date basis, our closed one deals have increased by 52% in the Americas, and 58% year-over-year in EMEA, driven by increased demand for work from home solutions or what we call home office, digital mailroom solutions and our payment offerings. We are pleased with the momentum that we’re seeing in our sales metrics and we’re optimistic it will benefit our growth in the second half of 2020 and into 2021.
I’ll turn the call over to Shrikant at this point to discuss our results in greater detail. Shrikant?
Thanks Ron. Good afternoon and thank you all for joining us.
In my discussion today, I will refer to both GAAP and non-GAAP results. As a reminder, reconciliations to these metrics are available in our earnings material. Any reference to the corresponding period of fiscal 2019 includes restated results for the interim period of 2019.
Let’s start on Slide 7 with a review of our first quarter 2020 results. Revenue for the first quarter totaled $365.5 million. On a constant currency basis, Q1 revenue was $367.2 million, representing a decline of 9.2% year-over-year.
Moving to our segments. Revenue for our ITPS segment was $284.1 million, a decrease of 12.6% year-over-year from $325.2 million in the first quarter of 2019. As Ron mentioned, this decline was primarily driven by our transition revenue as we exited contracts and statements of work that were not strategic to our long-term vision or unlikely to achieve our long-term target margins. This was partially offset by growth from existing customers and new wins.
Our Healthcare Solutions segment revenue totaled $64 million, up 4.4% year-over-year from $61.3 million in the first quarter of 2019. Our results in the Healthcare Solutions was attributable to increased volumes with existing clients. Our Legal and Loss Prevention segment revenue or LLPs was relatively flat at $17.3 million in the first quarter compared with $17.8 million in the first quarter of 2019.
Gross profit margin for the first quarter was down 324 basis points year-over-year to 20%. The gross margin decline was primarily due to our revenue decline offset by continued transformation and cost savings initiatives. It’s important to note that the impact of transition revenue on our Q1 margins was more significant as the revenue decline is preceding our reduction of stranded costs associated with the transition revenue.
Looking at the second half of 2020, we expect our gross margin to increase benefiting from higher customer volumes, particularly in Health Care and in Payments and from our cost initiatives, including reducing stranded costs associated with our transition revenue.
SG&A expenses for Q1 totaled $50.4 million, up 1.4% year-over-year and represented 13.8% of revenue. Net of one-time transaction costs related to the sale of our TBG business and our new AR facility, SG&A declined 5% year-over-year driven by lower revenue and cost saving initiatives.
Depreciation and amortization expenses was $23.2 million, down from $26.6 million in Q1 of 2019, but essentially unchanged as a percentage of revenue. Operating loss for the first quarter of 2020 was $2.2 million compared with operating income of $16.5 million for Q1 of 2019. The year-over-year decrease in operating income was primarily due to lower revenue and gross profit.
Turning to EBITDA and adjusted EBITDA. In Q1 of 2020, we generated EBITDA of $54.6 million, up from $38.9 million in the prior period. Our largest adjustments to arrive at the adjusted EBITDA included non-cash and other income and charges, and optimization and restructuring expenses, also called as O&R expenses. We will discuss the add backs to adjusted EBITDA more detail on Slide 8.
Our adjustment for O&R expenses totaled $13.1 million in the first quarter of 2020, down $1.7 million sequentially and $10.6 million year-over-year. Looking at the rest of 2020, we anticipate O&R expenses to land between $12 million and $18 million per quarter.
We recorded $4 million of transaction costs in Q1 2020 related to the TBG asset sale and our AR facility. We expect to book additional transaction cost in Q2 related to the amendment of our credit agreement and for these expenses down to roll off in the second half of 2020.
Finally, we had non-cash and other income adjustments of a nut negative $28.5 million in the first quarter of 2020. This includes a one-time non-cash gain related to a TBG asset sale of $35 million that was offset by $7 million of non-cash and other charges. For the remainder of 2020, we expect trends to be in line with Q1 2020 or some of our recent prior quarters adjusted for one-time charges or gains like TBG asset sale, which was one-off.
Adjusted EBITDA for the first quarter was $44.4 million, a decrease from $76.4 million in Q1 of 2019. Adjusted EBITDA margin for the first quarter of 2020 was 12.1% compared with 18.9% in the prior year period, a 670 basis point reduction. Excluding pass-through revenue and low margin client exit, our Q1 2020 adjusted EBITDA margin was 15%.
The reduction of the comparative period was driven by declining revenue and the pressure that put on the cost model resulting in the gross profit decline and in turn impacting our adjusted EBITDA. The remaining reduction was mainly attributable to the lower comparative O&R expenses.
Now let’s move to Slide 9 to discuss our liquidity. We’ve covered all these items on our Q4 earnings call. I would like to refresh and build upon our prior discussion. Our liquidity at March 31, 2020 was $97 million, up from $31 million at year-end 2019, and our total net debt was approximately $1.52 billion. As we discussed on our last call, our total liquidity improved to $106 million as of May 29 and has remained consistent through the end of the second quarter.
During the first half of 2020, we took several steps to stabilize and improve our liquidity position. As we previously announced, we executed on a new $160 million accounts receivable facility and also completed our first asset sale for approximately $40 million.
In addition, we have applied for U.S. federal stimulus and other regional government COVID-19 aid relief and we have exercised certain CARES Act provisions including deferral of our payroll tax match for the remainder of 2020.
We will continue to explore and implement additional actions to improve our liquidity this year. This includes our plan to complete additional asset sales of between $110 million and $160 million accelerating the alignment of our business to our traditionally working capital-light model and executing against our planned cost initiatives including cutting stranded expenses associated with our transition revenue.
Before I hand the call back to Ron, I would now like to discuss our second quarter and full year 2020 outlook. For the second quarter of 2020, we expect total revenue to be in the range of $300 million to $305 million, which includes approximately $35 million to $40 million negative impact from lower volumes, primarily from certain Healthcare and BFSI clients as a result of the COVID-19 pandemic and $5 million of decline attributable to the sale of TBG business.
As we mentioned on our June 9 call, given the uncertainty surrounding COVID-19 and its impacts on our visibility, the delay in providing financial guidance for full year 2020. I would like to however, reiterate factors that we expect will impact our performance for the balance of this year.
First, as Ron mentioned, we expect the adverse effects of COVID-19 on customer volumes and our financial results to have the most impact in Q2, before improving the second half of 2020. We’ve cautioned, however, the continuation of COVID-19 outbreaks go further impact the market and our performance.
Second, we will continue to see a decline in transition revenue as we exit these contracts and statement of work through rest of 2020. Third, in response to COVID-19, we are adjusting our capacity and cost structure including scaling back our FTEs and certain discretionary compensation.
In addition, we will be reducing the standard operating costs associated with our transition revenue. Improved volumes in the second half of 2020 combined with our cost initiatives should lead to more normalized gross margin performance in the second half of the year.
And finally, our capital allocation policy is to prioritize improving our liquidity and cash flow. We continue to pursue an incremental $110 million to $160 million in non-core asset sales in support of our strategy over the next 18 months.
With that, I will turn the call back over to Ron. Ron?
Let’s now turn to Slide number 11 and discuss our key 2020 objectives to driving improved operating income and cash flow generation. First, Exela is accelerating the alignment of businesses acquired since 2017, but moving away from the capital intensive model, which is FTE-based contracts running the payroll cost first and then collecting the revenue later to as traditional model or the services are less FTE heavy like DMR or home office for the working capital need is a minimal, and there is no upfront cost that need to be carried before collecting revenue.
Second, we are focused on driving growth of our base business. This includes expanding with existing and new customers within our banking, financial services and insurance, and healthcare industry segments where we provide mission critical billing and payment solutions.
Our recent partnership with Mastercard-Vocalink in the U.K. or Request to Pay solutions and our extended relationship with The Co-operative Bank by launching confirmation of payee services are great examples. Our year-over-year increase and business signings is a trend, we believe that illustrates our focus on this matter.
Third, we are increasing our focus on helping customers accelerate their digital transformation with solutions that address the new normal in the wake of COVID-19. As I mentioned earlier, we have seen an increase from customers seeking our work from home solutions or home office, Digital Mailroom solutions and Payment offerings. We have 81,000 users already live on our home office portal with an additional 56,000 users being on boarded.
Third, we are focused on improving our cost base to both react to the short-term slowdown caused by COVID-19 and to improve our cost structure and drive higher margins over the long term. We reduced our head count by 4% year-over-year in the first quarter and we will continue to optimize our head count for the exit of transition revenue through the remainder of 2020.
Finally, as part of our emphasis on our base business and also improving our liquidity, we will continue to exit certain non-strategic businesses via asset sale. As we discussed, our goal is to raise an incremental $110 million to $160 million of proceeds through this process or a total of $150 million to $200 million.
Now ending with Slide 12, I would like to summarize our response to COVID-19 and why we believe we are well positioned to weather this current environment and emerge a stronger company as conditions begin to improve. First, our rapid response enabled us to ensure the safety of our employees and business continuity with nearly uninterrupted services to our customers. Shortly after the onset of the pandemic, we put in place rigorous business continuity and employee safety plans. We have team’s essential business certification in most states in the U.S.
We’ve upgraded our facilities with adequate PPE supplied to provide a safe working environment and to comply with health and safety standards. We enabled work from home solutions globally and we set up a COVID-19 ward room with real time connectivity to global sites for continuous monitoring of our SLAs. From a customer perspective, we enhanced our communications between Exela, account managers and our customers with high frequency touch points and to ensure business continuity.
We pivoted to a new technology enabled solution, which helped our clients minimize interruption to their business functions. As I mentioned, we’ve seen strong growth in our sales metrics, driven by our demand for our home office solutions or home office. And finally, we finally we rapidly diverted volumes to unaffected offshore delivery locations.
Overall, we are pleased with our execution, which has enabled us to maintain 96% of our SLAs to our customers. We believe our strong performance is helping to differentiate us from our competitors in the market.
Second, we have quickly moved to adjust our operating capacity to match lower levels of demand and volumes in order to mitigate the impact on our margins. We adjusted our active FTEs by approximately 14% in response to an estimated 10% volume reduction due to COVID-19.
Some of this volume reduction is the result of increased delays in our pipeline, which is partly due to changes in our customers’ priorities in this environment, as well as when they explore larger transitions to digital transformation including our DMR, payments and billing digital solutions.
Third, we’ve improved our liquidity position in support of our needs. In this uncertain environment, we today have a total liquidity in excess of $100 million. And four, our ongoing operational turnaround and discipline has further helped us navigate the COVID-19 situation.
We are fortunate to have a resilient business model that is supported by our strong customer base, the mission-critical nature of our solutions we provide, favorable customer contracts, and our unique global delivery model, which combines on-site with near-shore and offshore delivery. We believe we are well prepared from an operational perspective as volumes are expected to normalize in the second half of 2020. That concludes our formal comments.
Operator, with that, please open up the line for questions.
[Operator Instructions] The first question today will come from Trent Porter with Nuveen. Please go ahead.
My first one is a tough one, you might not be able to answer, because I think Matt asked it last quarter, but now you’ve got a judgment today that you plan on appealing by July, if you had to pay the $57 million today, it looks like you would be getting close to the year of $40 million minimum liquidity threshold. So I wonder if you could talk in just broad terms, maybe how these things typically play out, let’s say, the appeal goes is unfavorable. Would you have to pay it immediately, or do you typically get time to pay it. And our other notwithstanding the potential asset sale proceeds, other liquidity considerations that we’re not thinking of, and then I have one follow-up?
Trent, thanks for the question. I will try to keep it high level. We are going ahead with the appeal. And from your question, what are the steps involved, we do have 45 days to submit an appeal brief as they call it and then typically the Delaware Supreme Court has a fairly proscribed process for appeals that last anywhere from six months to nine months. But in light of COVID-19, timeline could be longer. That’s the status update that I can provide you.
In terms of the payout, what’s going to potentially happen, something that I probably want to discuss in full details here, but I will tell you that the company feels confident that there is no immediate imminent payout expected since the appeal process will probably take its time.
And then, you’ve talked about, forgive me, I don’t remember covering this on the last call, you’ve talked about the COVID-19 related volumes improving in the second half. And just to get a better understanding of what the assumptions that are baked into that, I was wondering if you could talk a little bit or just flush out a little bit more what kinds of accounts that of yours – where you’re seeing this volume decline and maybe your ballpark if you could quantify the exposure you have to COVID vulnerable verticals and then after that, I’ll get back in queue.
Yes sure, I’ll probably give a very high level answer and then Ron can add to whatever I’ve missed. The broader answer, Trent, is that, healthcare and some of our print business which we would like to call integrated communication services was probably impacted, but you have to look at it in the context of where our customer concentration is? Our customer concentration is on the financial sector and healthcare, and it’s not on the travel or hospitality, right. Therefore the impact overall for us – perspective was not as huge as some of the other companies. I would put it that way.
I’m sorry, I’m writing as you’re talking. Just one quick one before I leave, I just wanted to clarify your $300 million to $305 million revenue target – for the second quarter target, estimate whatever you want to call it. If I strip out the COVID impact, there is still $40 million decline. I’m assuming that’s coming primarily from the transition accounts that impacted the first quarter?
It’s a combination of both, but that’s correct.
The next question will come from [David Propolis] from Unum. Please go ahead.
I just was curious on your presentation on Page 6, you talked about the profitability, the stranded cost related to the transition revenue. Is there any way you can – as you said you had $150 million of annualized revenue for this year, so we take a quarter of that, how does that, how the cost line up with that for this quarter. I’m just kind of trying to just see how the margins are working out here, it looks like you’re on the LMCE revenue you’re at 15% EBITDA margins versus 23.3% last year. So I just really wanted to drill a little bit further in the stranded cost?
And you’re looking at it from a Q1 perspective right, David?
Okay. Again, I will give you a directional answer here. As you know, there is a timing element involved right, as the revenue trends to drop off, the cost comes out later and one of the reasons we call the stranded cost is not only there is 100% of the variable costs do not go out in line with the revenue decline, Number 2, there is a fixed cost element involved right. That’s one key thing to keep in mind.
If I were to give you a direct answer, we estimate internal estimates are anywhere from 2% to 3% of stranded costs that are still in the system. The way I look at it, if you look at Q1 versus Q1 ’20 versus Q1 ’19, 23% margins versus 20% margins, granted revenue was down, we should have adjusted to costs down as well. It’s not have been quick enough. So simple terms, 2% to 3% of stranded cost in the quarter is still in there. Broader terms, we need to do a lot more to get the margins back up to where it was historically.
I have another question. In terms of, you guys have talked about further divestitures and is that – do you foresee that and I know it’s hard to calibrate when these happen, but is that, is that at 2020 timeframe, the way you guys are looking at that?
I’d like to stick to the original timeline of 12 to 18 months, right, when we said this in November, we said 12 to 18. From a management perspective, we’d like to get it done as soon as possible to alleviate all of the liquidity concerns that’s probably out there, but we are shooting for as soon as possible, but the timeline still remains 12 to 18 months.
And then my final question is, if you’re, you talked about gross margin improvement with volumes and stranded costs coming off and such. When we exit Q4, what would be kind of normalized margins that you’re thinking about gross margins. And second, with that, do you think you’d be cash flow positive in Q4?
That’s our goal. Right. That’s our goal, and let me, since David you are asking me the question as one of the early question, let me kind of give you a thought because we’re talking about transition costs, we are talking about transition revenue, we’re talking about standard cost and whatnot. I’ll point out to two or three of our publicly disclosed items from the past.
As you saw last year, one key element is revenue net of LMCE we saw 2.9% growth, even though on a GAAP basis, it was not the case right. In that you have anywhere from $270 million to $300 million of postage or pass-through costs.
Now, don’t get me wrong. That’s low margin. When it’s an integrated solution, we still like to have it, but if it becomes just pass through literally no margin, it doesn’t make sense for us, number one, that’s a top line perspective. In Q3 and – Q2 and Q3, we had listed our business transformation slides, where if you go back and refer to it, you will see 45% to 50% of the company is at 35% margins.
And then you’ll see there is an element of 15% to 18% margins for some of our revenues. And then there is another one with 20%, right? So ideal world, we want to get back of the higher margin side of the business, right.
Third point is, you can look at our factsheet FY ’17 versus ’18 versus ’19, what where our gross margins. We have seen a declining trend. We want to reverse that. That’s the key element of both whether you’re calling it – now looking at the transition revenue, fixing our costs, end of the day, it’s about getting better with our gross margins and then the cash flows will follow.
Sean? Sean, are you still on?
[Technical difficulty] Excuse me the conference operator, apologies. It looks like we may have had some technical difficulties, I’ll just be filling at here momentarily. I’m sorry to the management team and everyone else. So we proceed to the next question.
The next question will come from Bryan King of Congruent. Please go ahead.
I just wondered if you could provide more color on pricing. Our customers are trying to pushing harder on pricing in light of corona and going forward. Can you just speak more on that, I think that would be helpful?
This is Ron. No, that’s a great question. So you have to think about the nature and the relationship we have with these customers. I’ll give you an example. The top 20 customers that we have with the company have been with us an average of 16, 17 years now and so we have long-term agreements with them three to five years.
The more technology they have, the longer the term some contracts are in the seven year to 10 year range. But because of that relationship as we came into this, I call it a downdraft from the volumes from the way the world kind of stopped for that moment in late March and April. We were able to navigate through that.
We have guaranteed minimum pricing anyway in our long-term contracts, but we partnered with them. We’re their technology partner and as a result of that, they look to us to be able to pivot to work from home solution or remote or offsite that they didn’t have before. So for us, it was never a conversation about, can you do it for less money.
Can you give us longer terms, which is another question is probably out there. We just did not see that kind of traffic. It was more of a cry for help, especially in healthcare and in the financial services, Exela is deemed an essential service partner.
So, as a matter of fact, we are the ones that helped to move the mission critical services that these companies, our clients and customers offers. So it really was sort of that 911 type of call. Can you help solve it? And I think I didn’t talk about Slide 13, but if you look at the deck, you could see the video testimonials from the firefight. The men and women that work for Exela were on the front line and work 24/7 to ensure that our customers did not see a break in service. And like I said, we were able to maintain 96% of our SLAs during this – what I’ll call storm.
And the next question, we will have will come from Allen Kato of Beach Point Capital.
I guess, first, could you help us understand a bit more of what the actual services are within transitional revenue and I had a bit of trouble understanding and one of the other callers’ questions. What is the stranded cost opportunity associated with that or what is the EBITDA contribution from those transitional revenues?
Sure, Allen. To address both your questions, right, let’s talk about transitional revenue. I wouldn’t want to categorize it by a certain bucket. I’ll go back and emphasize what our focus is, which is, as Ron mentioned base expansion continues to be the focus, top 200 customers and growth there continues to be our focus.
What we kind of want to look at more closely is the unpredictable non-recurring or any customer return or margin – customer margin that’s unlikely to achieve our long-term margins, right. That’s why I kind of pivoted back to a couple of things that we’ve talked about in the recent past.
Take out our LMCE revenue – postage LMCE revenue actually we have revenue growth, impact of low margin on our business is continuing to create a margin compression and we need to reverse that, right. So that’s – so when I kind of summarize this transition revenue is nothing but we are still looking at customers, customer margins or areas where we need to start pushing for more margin improvements.
If it doesn’t make sense for the business, it’s better that we exit it, focus on the margins, focus on the margin dollars. So if you ask me what industry, what bucket, what customer, no I don’t think we have that kind of a categorization assets to talk about, at least not on this call.
Stranded cost, again, it’s more of a term that we are using here to indicate that when there is a revenue decline, the variable cost is not 100% relatable to it in the same month same quarter it comes off, but slower than the revenue drop, number one. Number two, we also have an element of fixed cost that has to come out eventually, whether we call it facility consolidations, looking at the way we work, managing capacity. It’s a much bigger exercise.
So that is where I gave the comparison of, hey, when we were making 22%, 23% margins in the past, it’s not happening right now in a time when revenue is declining. We need to adjust our cost, be it the leftover variable cost or the fixes that has not filtered out that has to go out of the system. That’s what we mean by the stranded cost concept.
And then, I guess, what causes the timing disconnect between the lost revenue and then the associated costs? Is it just planning for headcount reductions or what’s kind of underlying driver for that?
I would say the majority is that. It’s really headcount and capacity management. So better real time more quicker way we can do it, the better off we are.
So the 3,000 FTEs that have been labeled as non-active, those are still employed by the firm. Is that right?
That is correct. Only point or there is, I don’t want, – so even if you looked at our presentation, right, there is between 902 FTEs that we talk about from a savings perspective versus the 3,000 there is a difference. The 3,000 inactive is more in Q2 and related to the volume declines related to COVID.
So while there – in Q2, there is an interplay between COVID-related revenue decline and the transition revenue, it’s going to be hard to pinpoint and say, which is what but I want to keep that in mind when you look at the 3,000 FTE number, that’s more specific to the Q2 and related to COVID. Once the volumes are back up, we know those employees could get back to be the workforce.
Just two more quick ones. When you take that all into consideration, do you see – what do you see as the path to bringing the company back to high 200s of adjusted EBITDA, like low 200s of cash EBITDA as was the case in 2018?
I think I’ll put it in one line, profitable revenue growth. Right. We need revenue, we need revenue growth. But at the same time, it’s very important that there are some margin growth, not just in percentage terms, but in dollar terms as well. So I think this, as you see a lot of what we are seeing the recent past is focus toward how do we improve our margins.
So when you talk about the transitional revenue being margin accretive back on a percentage basis, but on a gross margin dollars basis, is it going to be pretty much offset by the expanded cost you take out?
And then just one last question, I guess on – looking at kind of liquidity. I think you guys said there is $106 million at the end of June, which implies some moderate amount of unlevered free cash flow. But when you think about that level of liquidity relative to $140 million of debt service per year, and I think based on adjusted EBITDA recently doing more asset sales at six times what necessarily delever the company. So how do you think about the long-term support needed for the capital structure and kind of how to provide that, and I guess one thing I forgot to add on liquidity is when you appeal the judgment, is there a bond required to be posted?
Allen, few different questions, I realize it’s an important question as well. So I’ll put it this way. The company has always met its obligation toward any of these payments. Right. That’s number one. We have additional livers to further improve our liquidity, it may be number two, long-term, obviously it all is going to fall back on operational performance.
Right. I mean we have other levers, we have financing options, we have whatnot, but long-term goal as we have been focusing here and talking about is execution, execution is the operational level to start generating operational cash flows.
In terms of the last question that you asked, I do not have maybe the legal team or I need to discuss this with the legal team and whatnot, at least from what I know we just probably a little bit early here is there are potentially options to proceed with the appeal without having to pay the bond. But then again, as I said, I’ll caveat it by saying I do not know enough on that, and that’s something that our legal folks should probably address at some point in time.
The next question will come from Jerry Wang with Carlyle. Please go ahead.
Just had a quick one, I think, on Page 12 we have, your sales when closed in the quarter was up pretty materially, can you just say what dollar amount that is associated with in the Americas and EMEA?
This is Ron. I don’t know that we had disclosed that level of detail. Jerry. But, excuse me Shrikant did you – I don’t think we have that information quantified, did we?
Yes. Jerry. Let’s do this. We can get the numbers for you probably at a later point of time. I do not have it off and let me put it that way. We don’t know on a percentage basis year-over-year growth.
That will conclude today’s question-and-answer session. I would like to turn the conference back over to Ronald Cogburn for any closing remarks.
Thanks. And once again we want to thank everybody for participating today in the call, and we appreciate your questions and you know as always you can reach out to us directly through ICR through Will Maina, or directly to myself or to Shrikant. Thanks again, and we’ll see you on the Q2 call and everybody stay safe in this environment. Thanks. Bye.
The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.