Following is the transcript of the announcement of West Corp (NASDAQ:WSTC) of the sale of several of its agent services businesses in a definitive agreement with Alorica, Inc., made on Thursday, January 8, 2015, 11:00 AM ET.The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary conditions.
West Corporation (NASDAQ:WSTC) is a publicly traded telecommunications service provider. For over 25 years, it has been a global provider of reliable and high-quality communication and network infrastructure solutions. The company has an international client base, with employees throughout the United States, Canada, Europe, the Middle East, Asia Pacific, and Latin America.
Host:
Dave Pleiss, Vice President of Investor Relations, West Corporation
Company Representatives:
Tom Barker – Chairman and Chief Executive Officer, West Corporation
Analysts:
Sara Gubins – Bank of America Merrill Lynch
Gary Bisbee – RBC Capital Markets
William Warmington, Jr. – Wells Fargo Securities, LLC
Adam Dahms – Robert W. Baird& Co.
S.K. Prasad Borra – Goldman Sachs
Dmitry Netis – William Blair& Company.
Operator
Good morning, ladies and gentlemen and welcome to the West Corporation call. At this time, all participants are in a listen-only mode.Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions.) As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce you to the Vice President of Investor Relations of West Corporation, Dave Pleiss. Please go ahead.
Dave Pleiss, Vice President of Investor Relations, West Corporation
Good morning and thank you for joining us to discuss West Corporation’s divestiture of several of our agent services businesses. If you have not received a copy of yesterday’s press release, you can find one on our website at west.com. Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated or projected. Listeners to the call are advised to review the risk factors contained in our most recent form 10-K for additional information regarding such risks, uncertainties, and assumptions. The company assumes no obligation to update any forward-looking statements made during this call.
In this call management, we will discuss non-GAAP financial measures. A reconciliation of these financial measures to the most comparable GAAP financial measures can be found in the press release. At this time, I would like to turn the call over to Tom Barker, our Chairman and Chief Executive Officer.
Tom Barker,Chairman and Chief Executive Officer, West Corporation
Thanks, Dave. Good morning everybody. Thanks for joining us today in the call in such short notice. Also those of you on the webcast. We would like to take this opportunity to walk you through some of the details of yesterday’s announcement. As I hoped you saw in the press release, we entered into an agreement to sell several of our agent services businesses to Alorica, a large provider of customer management outsourcing solutions. The businesses we are selling include our consumer facing, customer sales, and life cycle management companies, account services and receivable management businesses for $275 million. This is an all cash offer. There are no financing contingencies, but it is subjected to the customary closing conditions.
We expect this transaction to close in the first quarter of 2015. West Corporation ran a very thorough robust process with many potential buyers, both strategic and financial. The bid process was highly competitive. We think the timing was right, with good valuations in the marketplace and we are happy with the results and confident that our clients-employees will be wellserved by the team at Alorica. These are great businesses that Alorica is buying. We are proud of the reputation we have built in this industry. Our team here has really delivered on building and running these businesses for over 25 years and I would like to take this opportunity to publicly thank them.
West Corporation’s strategy of diversifying from an agent centric model to a more technology enabled, less labor intensive business began over 10 years ago with our acquisition of InterCall in 2003. We have completed over 30 acquisitions in the past ten years, but this time is different. We are continuing the strategy by divesting and we think that divesting these businesses will accelerate the transformation of our company. These are really good companies. But when we compare the growth and profitability of the businesses we are selling, they are just not as attractive to us as other line businesses.
The agent services businesses we are keeping include Health Advocate, which we just purchased in June 2014, our B-to-B group, and our healthcare cost containment services. These companies combined manage very valuable transactions with a combination of highly trained people, analytics, and technology. They have margins similar to what we report on this consolidated basis. They also participate in U.S. healthcare vertical market, which is an attractive market to West Corporation. We think West Corporation is in an enviable position in the healthcare marketplace and we remain focused on this market.We think it is important for our company.
Following the divestiture, we are going to have a strong, attractive portfolio of assets and we have no plans to divest any of our remaining businesses. While this move is consistent with our long-term strategy, we do expect it to have a transformative impact on West Corporation. Over the next few years, West will look much different than we have in the past. Faster revenue growth and margin expansion overtime should help West Corporation to become a more valuable organization as we become more favorably positioned with other transaction processing companies. We will be better aligned with them at a number of fronts. Our story will be cleaner, easier to understand and be more focused. We expect to have better revenue growth and economy as a scale that we have to improve profit margins and we will have much less client concentration than we previously had. We expect our largest customer to be between maybe 3% and 4% of our revenue. Our top ten clients will represent about 19% of our total revenue. This compares to about 24% before the sale.
We will also be a much more efficient company. After approximately 25,300 employees moved to Alorica, our revenue employee will increase from approximately $80,000 per employee to over $225,000 per employee.
Moving to the financials, the proforma impact of this divestiture at our 2014 results is approximately $580 million in revenue and approximately $48 million in adjusted EBITDA. The adjusted EBITDA is made up of about $35 million in the businesses we are selling on a fully allocated basis and $13 million incorporate and shared services cash expenses that are currently allocated to the businesses we are selling that will stay with West Corporation.
With respect to the $13 million estimated cost, we will work to reduce or repurpose these expenses throughout 2015. We have a transition service agreement in place with Alorica that will require us to provide services over the next 3 to 12 months. After which time, we will have more flexibility in how we address this cost to drive increased deficiencies.
As we stated in the press release, we will also look to sell some real estate that we own, that will be leased by Alorica. We estimate the total cash we will realize from the sale of the business and real estate net of fees and taxes will be approximately $285 million. West Corporation generates a significant amount of cash and we have been good stewards of that capital. Our priorities for capital allocations have not changed. We plan to use the proceeds of this sale to make the company more valuable. We will look at acquisition opportunities like we always do. We would like to find other companies like our recent acquisitions. We could find the next health advocate, the next 911 enable, I will be very excited. We will evaluate the impact of paying down debt. Our cost to capital is pretty low now, so we will carefully evaluate our cash position at closing, look at the debt markets, and evaluate our acquisition pipeline.
All of these points will be considered to make sure that we optimize the value of the proceeds in the sale. This is what our management team does and this is what our board of directors do on a regular basis.
Before we open up the call to your questions, please keep in mind that the purpose of this call is to discuss this transaction. We have not yet closed our 2014 financials so we will not be able to provide details for this year. We will also not discuss 2015 and its projections. We have scheduled the Fourth Quarter Earnings Call for January 28 and we will discuss 2015 guidance and what West Corporation looks like after this transaction at that time. At this time, I would like to open up for questions that relate to the information provided on this call and in our press release.
Question and Answer Session:
Operator
(Operator Instructions). Our first question will come from the line of Sara Gubins with Bank of America Merrill Lynch. Please go ahead.
Sara Gubins,Bank of America Merrill Lynch
Hi and thanks.Good morning.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Good morning.
Sara Gubins,Bank of America Merrill Lynch
From a seasonality perspective, I just wanted to check if there’s anything worth noting about the businesses that you are selling?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
No. There is pretty much consistency between the quarters of these businesses when taken in balance. Some of the collection companies may have a little bit of seasonality from time-to-time when the consumer gets the tax refunds that could impact it, but that is more relative to this total pool of revenues. That was pretty steady.
Sara Gubins, Bank Of America Merrill Lynch
Okay. Are these all currently in communication services?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes.
Sara Gubins, Bank Of America Merrill Lynch
Okay. Just from a cross-sell perspective, are these services that clients who are buying other capabilities from you are currently using?I am wondering if you are expecting any fallout from these segments being under different ownership for the rest of your business.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
No. Starting yesterday, we had some discussions with some of our largest clients. You are right. Cross-selling has been very, very important for West Corporation and we are going to continue to provide services to the clients we have got existing relationships and we are confident in our ability to do a really good job for these guys and I expect them to stay with us. I do not expect this divesture to have an impact on our ability to provide services for clients that are customers of these businesses we are selling.
Sara Gubins, Bank Of America Merrill Lynch
Great. Okay, good. Thank you.
Operator
Your next question comes from the line of Gary Bisbee with RBC Capital Markets. Please go ahead.
Gary Bisbee, RBC Capital Markets
Hi guys. Good morning.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Good morning, Gary.
Gary Bisbee, RBC Capital Markets
Is this something you could have done for years. Any comments here on why now? I guess you said you thought valuations were attractive and that was one that is accurate. But anything?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Sure. You are right, Gary. This is something that has been brought up on our quarterly calls. It is something our management team has looked at and our board has looked at a number of times over the years, but we needed a time when the businesses were performing well, when the peers had good track records and valuations, where there was access to attractive capital to finance a transaction like this. It is helpful that there is not a lot of excess capacity in the markets right now that helps profitability of these companies and goes right to valuations. We thought the timing was right, that we could drive good value, and that we would have a good sized list of prospects to talk to to ensure a very competitive environment and process.
Gary Bisbee, RBC Capital Markets
Okay, great. Then a followup, I appreciate the comments on how you will be thoughtful around use of proceeds here. At the time of the IPO, there was much more of a thought process around bringing leverage down. It has come up and I understand the positive transactions you have done that have resulted in that. How should we think about it over the next three to four years? Are you still thinking that three to four times is the right number? Clearly, you are above that now or should we think it is five times as a number you are very comfortable with in terms of the leverage?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Well, there are two elements to that. One, what are we comfortable with? This is a business that requires very little as a percentage revenue for CAPEX. Has really attractive margins overtime. I think those margins should go up given these divestitures. The leverage ratio that we have right now is one that does not impact our ability to grow and manage this business. That being said, would West be considered to be more valuable if they had less leverage? Probably and that is something we were going to look at.
We go to a period of time when acquisitions present themselves so we can create a lot of value, like we did in 2014. You can look at 2013 when we really did not complete any acquisitions. Not because we did not want to, we just did not think we could drive the value that we would like to see. Overtime, I expect the company to continue to grow. I expect it to grow faster. I expect it to be more profitable, and I expect leverage to come down.
Gary Bisbee, RBC Capital Markets
Okay. Then just one last clean up one, the D&A of 24 million in the chart in the press release, is there a way you could give us the breakdown between D&A? I’m just trying to think through your definition adjusted earnings impact to it. Thanks.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
I am not sure we have that right now, Gary, but you know what? We can give you a holler back
Gary Bisbee, RBC Capital Markets
Okay, thank you.
Operator
Your next question comes from the line of Bill Warmington with Wells Fargo. Please go ahead.
William Warmington, Wells Fargo Securities, LLC
Happy New Year.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Good morning, Bill.
William Warmington, Wells Fargo Securities, LLC
Good morning. One question for you on communication services. What is the organic growth rate of that going forward? How should we think about that? You have got a number of…
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes. When I give our guidance for 2015,Bill, we will tell you how we expect our companies to grow where the growth is coming from and what part is going to be organic and what part comes from acquisitions.
William Warmington, Wells Fargo Securities, LLC
Got it. Okay. How should we think about those 13 million in estimated costs in terms of what is in it and how you are going to eliminate it or should we expect you to eliminate all of it or not?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
I do not think we can eliminate all of it. I am in there and always [crosstalk 00:14:23] balance in leadership team so it does not all go away, but part of it has to do with when can we start to address it? As part of this sale, we are committed to providing services and a smooth transition. These employees and these client relationships are very, very important for us. We are taking on a transition process so we will not be able to address many of those cross for some time. When I give our guidance for 2015, I am going to try to do a decent job of saying, “This is the part we think we can address in 2015. And this is when we would expect that impact to be felt by quarter throughout the year.”
Our first order business is to make sure we take care of our employees and take care of our customers and then address as much of that as we can. I think overtime, hopefully some of those cross go away and some of them will be overhead absorbed by the existing and new businesses that are part of West.
William Warmington, Wells Fargo Securities, LLC
On the client side, does AT&T continue to be your biggest client going forward?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Well, I think you have heard me say it. We have got one client that maybe between 3% and 4%. That is well below the disclosable threshold of anybody, so I do not think we are in a position to discuss that.
William Warmington, Wells Fargo Securities, LLC
Okay. The last question for you is how we should think about the free cash flow generation of the remaining businesses going forward,either an absolute dollar amount or percentage of EBITDA or percentage of revenue to try to give us a sense of remodelingthat?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
We are going to give you, I think, that data point on all three fronts on our 2015 call.
William Warmington, Wells Fargo Securities, LLC
Okay. Well, it sounds like the January 28 will be a big day then.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
It should be a good call.
William Warmington, Wells Fargo Securities, LLC
All right. Thank you very much.
Operator
Your next question comes from the line of Adam Dahms with Baird. Please go ahead.
Adam Dahms,Robert W. Baird& Co.
Hey guys. Thanks for taking my questions.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Good morning, Adam.
Adam Dahms,Robert W. Baird & Co.
Good morning. First off, can you give us a sense on what the growth has been in those businesses you sold maybe over the last year or so?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Well, we don’t break out the revenue and profitability for the individual business. You do have good information from us in every queue, Adam, that talks about our labor intensive businesses and how they are performing, but we have never broken out the revenue and profit profiles for those. This is not the time for us to do that, but I think what is important to understand is the businesses that we are keeping have very, very attractive growth and profit profiles and we will give you more visibility into that in 2015.
Adam Dahms,Robert W. Baird & Co.
That is fine. That makes sense. You guys said you are kind of weighing deleveraging versus potential acquisitions, any thoughts on the timing of kind of when you are going to use that cash?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Well, I think the first challenge for us is to get the cash, so we have got to close this business some time the first quarter. At that point in time, we are going to look at what is our cost to capitals as opposed to what the market is charging for that. We will look at what opportunities we have to drive initial transactions to West Corporation. We look at the other cash on hand, cash needs for the next couple of quarters, and the surplus cash we expect the business to throw off and only, after we have all that data in front of us, I think, are we in a position to make an intelligent decision.
Adam Dahms,Robert W. Baird & Co.
That makes sense. Then I guess just one quick last one on the corporate overhead, that 13 million. I know you said it all cannot go away, but you are going to kind of work to reduce it over the next year. Any chance that could kind of go up in the near-term due to like, retraining costs or anything like that?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
There will be some other… our CAPEX gets impacted maybe a little bit because some of the systems and support networks that are going over to Alorica, we are still going to need. We are just going to need on a much smaller scales,so we are going to have to still stand up some support services and systems. Overall, a business with less than 10,000 employees should make us a lot leaner, a lot more nimble, a lot easier to manage especially given the profit dynamics of this business going forward.I would expect overtime this business to have an improving cash flow and profitability dynamics.
Adam Dahms,Robert W. Baird & Co.
Sounds good. It makes sense. Thanks for answering my questions, guys.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
You bet.
Operator
Your next question comes from the line of S.K. Prasad Borra with Goldman Sachs. Please go ahead.
S.K. Prasad Borra, Goldman Sachs
Thanks for taking my questions. Firstly, I just wanted some clarification. Did you say that you are not planning any more divestments?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Correct. We said we are happy with the businesses we have and there are no additional divestitures planned at all.
S.K. Prasad Borra, Goldman Sachs
Okay. Probably just to follow on that point, you have ideas of levels of improving your financing, now you reduced the scale of your business, quartered off the lower margin part of the business. Just in terms of the strategy forward, are there any other initiatives left for you guys to think about beyond more[unintelligible – 00:19:58]?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
There is a lot of them. This is a complicated portfolio of assets. We are in a lot of different markets than we would like to expand our position in public safety, notification and alerts, healthcare, Cloud-based IP communication solutions. We have got a number of fast growing businesses and we are trying to figure out how to accelerate the organic growth rate of this company and improve its profitability.
S.K. Prasad Borra, Goldman Sachs
Okay.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
No body in here is resting on their laurels. There are plenty for us to do and we are excited about our ability to keep this company growing.
S.K. Prasad Borra, Goldman Sachs
Okay, very clear. Just probably last one. When you think about the margin profile of the agent-related business which has left, you eluded that the margins are more comparable to the group level. What gives you the confidence that you can keep the margins or probably even improve the margins from current levels in these businesses?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Well, I did not say we are going to improve the margins in those businesses, although we will certainly strive to. What gives us confidence? We have been running these businesses for a while except for Health Advocate, we have not owned for that long. There is a wonderful diversification of revenue. It is very, very easy to measure the value contribution that these guys have for their clients and this represent unique offers, a very hard-to-find combination of skills and training with the agents, use of analytics, and coupled with the technology and decision-making platform that helped us provide a very valuable service to our clients. It is that kind of value and the efficiencies that West Corporation can help bring to this portfolio of assets that gives us confidence in our ability to throw off good cash, good margins from these three businesses. For two of the three, we’ve managed for quite some time.
S.K. Prasad Borra, Goldman Sachs
Yes. That is very clear. Thanks, Tom.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Okay.
Operator
Your next question will come from the line of Dmitry Netis with William Blair. Please go ahead.
Dmitry Netis,William Blair& Company
Great, thank you. Good morning, gentlemen.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Good morning.
Dmitry Netis,William Blair& Company
A couple of quick ones from me. Just as I visualized your agent-based services business, so you are divesting pretty much everything that is business to consumer but you are maintaining your business-to-business side, is that correct?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
That is correct.
Dmitry Netis,William Blair& Company
Is that the way you think about this? Okay.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes.
Dmitry Netis,William Blair& Company
Then will you continue investing in that business-to-business B2B? Is this something that will see additional investment? In the previous discussion, it does not seem like you will be divesting that piece of that business. I would like to get a sense of…
Tom Barker, Chairman and Chief Executive Officer, West Corporation
That is a good question and a good point. I want to make sure we are clear about this. These are businesses that are really attractive for us. They have got, together, I look at this pool, I think they have got growth characteristics at close to twice what we would like our organic corporate growth rate to be. They have got margins consistent with what we report on a consolidated basis. We will invest in these businesses. We will invest in technology. We will invest in people. We will invest in infrastructure. There are also candidates for acquisitions. These are businesses that I expect to be important and continue to contribute to the overall growth and profitability of West Corporation.
Dmitry Netis,William Blair& Company
Okay, and… go ahead.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
I mean,if you just take a look at the size of what we have left and we will try to give you more detail in this in our guidance call, but if I look at the profitability of these businesses, their ability to contribute to the growth and profitability and cash flow of West Corporation relative to the poolof assets we are divesting, this helps make us a better company.
Dmitry Netis,William Blair& Company
Great. It sounds like we will get some numbers around the remaining pieces of the business when you report.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes, what I expect out of that business. Yes.
Dmitry Netis,William Blair& Company
Whatever is left in that agents business. Okay, that would be very helpful. Also, can we expect you to provide kind of a backward-looking, I don’t know if you do it quarterly or for the full year, but so that we do not… as you go and give guidance on growth going forward, it will be excluding the divestitures. We should be able to kind of adjust our models in our 2013 timeframe to kind of see what the performance growth would look like.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes.
Dmitry Netis,William Blair& Company
Would we expect you to give us that information?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
Yes, it should be clear. We are going to pursue discontinued operations as a way to present our financials and you should be able to get a good measurement of how we have looked on comparable periods previously and going forward.
Dmitry Netis,William Blair& Company
Okay, perfect. Then last question, any sense of what the cost savings would look like from these employee, 25,000 people, that are moving over to Alorica? What that reduction in costs might look like on a backward-looking basis?
Tom Barker, Chairman and Chief Executive Officer, West Corporation
No, that is a complicated question and that really goes to businesses and not just people.
Dmitry Netis,William Blair& Company
Okay, great. Thank you.
Operator
At this time, there are no further questions. I will turn the conference back over to management for any closing remarks.
Tom Barker, Chairman and Chief Executive Officer, West Corporation
I just want to thank you all for participating in this call in such short notice. We are excited about what West Corporation looks like going forward and you can be assured that we are going to do our best to drive as much value out of the cash this business draws off and I look forward to speaking with you all in just a few weeks as we go through our numbers as we close up ‘14 and give you our best guess on what we expect for 2015.
Thank you all very much.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you all for joining. You may now disconnect.
