Exela Technologies inc (XELA) Q2 2020 Earnings Call Transcript

Exela Technologies inc (XELA 1.53%)
Q2 2020 Earnings Call
Aug 11, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Exela Technologies second-quarter 2020 financial results conference call. [Operator instructions] At this time, I'd like to turn the conference call over to Will Maina, investor relations. Sir, please go ahead.

Will Maina -- Investor Relations

Thank you. Good morning everyone, and welcome to Exela Technologies second-quarter 2020 conference call. I'm joined today by Ron Cogburn, Exela's chief executive officer; and Shrikant Sortur, our chief financial officer. Following the prepared remarks made by Ron and Shrikant, we'll 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 exelatech.com. A replay of this call will be available until August 18. Information to access the replay is listed in 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 the 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 in 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 measures. We believe these non-GAAP measures provide additional information on how management views the operating performance of our business. Reconciliations between GAAP and non-GAAP results we discuss on today's call can be found on 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'd now like to turn the call over to our CEO, Ron Cogburn. Ron, please go ahead.

Ron Cogburn -- Chief Executive Officer

Good morning, and thanks everyone for joining us today on our second-quarter earnings call. Before we begin, I would like to highlight that we have a quick snapshot of Exela on Slide No. 5 of our presentation for anyone who is new Exela or just wants a refresh on our new business. Now, let's begin today with Slide No.

7. We are pleased with our second-quarter results which reflect focused execution against our key objectives despite the many challenges caused by COVID-19. The combination of our mission-critical solutions, focus and quick response to our customers' priorities in this current environment, enabled us to generate second-quarter results that were above our expectations. Our second-quarter 2020 total revenue on a constant currency basis was $309.2 million which is above our prior guidance.

Our Q2 revenue declined versus the prior-year period, mainly reflects the impact of COVID-19 on our volumes and the elimination of transition revenue. We delivered sequential improvement on our gross profit margin in the second quarter which was up 148 basis points from Q1 of 2020. We generated $43.3 million of adjusted EBITDA on a constant currency basis in Q2. Our adjusted EBITDA margin was 17.1% when excluding pass-through and low-margin customer exit revenue and was up 210 basis points sequentially.

And we ended the month of July with $82 million of total liquidity, post the payment of the semiannual coupon of $50 million. We expect our positive momentum in Q2 to continue into the back half of 2020. We currently estimate total revenue in the third quarter of $305 million to $312 million. In the month of June, our margins were substantially better than the preceding five months and similar to our margin levels in -- back in 2018.

We currently expect this upward trend in our margins to continue into the second half of 2020, with sequential improvement in our gross profit and adjusted EBITDA margins in the third and fourth quarter as our volumes are on a trajectory to recover to post -- to pre-COVID-19 levels, and we continue to realize the benefits of our cost-saving initiatives. Shrikant Sortur will provide more detail on our 2020 outlook in just a moment. Overall, our results and our outlook not only underscore our ability to weather the COVID-19 storm but our ability to find new opportunities for growth in this environment, all while executing against our long-term objectives of growing our core business, increasing our profitability and improving our liquidity. Let me provide you with some highlights that illustrate how we are driving forward with focus and momentum.

We are seeing increased demand across our customers and industry groups for solutions that will enable them to operate more efficiently and meet the expectations of their customers, partners and employees in a post-COVID-19 world. To achieve this, our customers are seeking a partner that can provide end-to-end mission-critical business process automation solutions at scale. This is a trend that plays to the strengths of Exela Technologies and is having a positive impact on our pipeline and our new business wins. Year to date, our closed won sales for our payment offerings and our work-from-home solutions or home office which includes Digital Mailroom, have increased by 41% in the Americas and 38% in EMEA year over year.

Since March 2020, our pipeline for these same solutions has increased by $64 million with $34 million of this $64 million coming from the Digital Mailroom and the remaining $30 million from the payments offerings. This solid growth reflects new programs and campaigns we launched targeting solutions that are specifically tailored to address our customers' needs in a remote working environment, wherever that may be. As part of our ongoing cost saving initiatives to align our workforce with the Q2 demand environment, we reduced our headcount by approximately 7% during the first half of 2020. Looking to the second half of this year, we will continue to carefully balance our cost base taking into consideration our expectation of increased volumes as well as the further elimination of stranded costs associated with transition revenue.

Our focus and execution on cost savings across the entire organization is a major reason behind our expectation of sequential improvement in our gross and adjusted EBITDA margins in the second half of this year. Lastly, I'd like to note that we completed another core -- a noncore asset sale last month. As we announced on July 23, we completed the divestment of our physical record storage and logistics business for $12.3 million. This transaction is another milestone in our initiative to sell nonstrategic business assets, with total proceeds of between $150 million and $200 million over the next two years.

With the completion of this sale, we have now executed $50 million of this plan, helping to strengthen our financial flexibility. The remaining $100 million to $150 million are on schedule. I will now turn the call over to Shrikant Sortur to discuss our results in greater detail. After Shrikant, I'll come back to cover our outlook and 2020 initiatives in more detail.

Shrikant, over to you.

Shrikant Sortur -- Chief Financial Officer

Thank you Ron. Good morning, and thank you all for joining us. I want to echo Ron's comments. We are pleased with our second-quarter execution and business momentum in light of the challenging environment.

Before I cover our financial results for the second quarter, I would like to touch upon how we managed and performed against the four areas of impact that we shared with you on our last earnings call. As a reminder, the four areas were: One, our expectation that the adverse effects of COVID-19 on customer volumes and our financial results would have the most impact in Q2; two, expected impact of the transition revenue; three, capacity and cost structure management with the goal of achieving normalized gross margin performance; and four, our capital allocation policy focused on improving liquidity and cash flows. I'm pleased to report that we managed and delivered solid performance across each of these four areas. In a challenging macro environment, our team managed to overcome the negative impact of COVID-19 and transition revenue and delivered Q2 revenues above the high end of the guidance range we provided on our Q1 earnings call.

To provide additional context on our second-quarter results, I will talk about the monthly progression of our revenue and gross margin trends during the quarter. We experienced lower volumes in April and May and saw an improving trend across most of our service lines in June. We took aggressive actions to bring costs in line with activity levels. Our gross margin for the month of May and June was in the 24% range and in line with our goal of achieving higher margins after two consecutive quarters of 20% gross margins prior to Q2 of 2020.

Our liquidity has remained strong throughout the quarter. As Ron indicated, on July 23, we completed the divestment of our physical record storage and logistics business for $12.3 million as part of our initiative to sell nonstrategic business assets to help strengthen our financial flexibility. Now, let's turn to our results for the second quarter. In my discussion today, I'll refer to both GAAP and non-GAAP results.

As a reminder, reconciliation 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 8 with a review of our second-quarter 2020 results. As we discussed on last quarter's call, on January 1, we had approximately $150 million of annual transition revenue that we plan to exit by the end of second-quarter 2021.

We have a plan in place and are working diligently to rebalance our resources and remove the stranded costs associated with our transition revenue by the end of 2021. It's important to remember that declining transition revenue is expected to have a positive impact on our gross margin profile over the long term. With the elimination of stranded costs, we'll continue to lag the exit of our transition revenue. Revenue for the second quarter totaled $307.7 million.

On a constant currency basis, Q2 revenue was $309.2 million, representing a decline of $83 million or 21% year over year. Our year-over-year revenue performance mainly reflects negative volume impacts due to the COVID-19 pandemic and are except from certain customer contracts and statement of work which were not a strategic fit to Exela's vision. And we refer to this as transition revenue. On our Q1 earnings call, we had indicated an estimate of negative $35 million to $40 million impact on Q2 revenue from COVID-19.

A quick look at our segments. Revenue for our ITPS segment was $243 million, a decrease of 21.6% year over year from $309.8 million in the second quarter of 2019. The impact of transition revenue was the highest in the ITPS segment. Our Healthcare Solutions segment revenue totaled $49.2 million, a decrease of 22.4% year over year from $63.4 million in the year-ago period.

And our Legal and Loss Prevention segment revenue or LLPS, was $15.5 million compared with $17.6 million in the second quarter of 2019. Gross profit margin for the second quarter was down 84 basis points year over year to 21.4%, but up 148 basis points sequentially from the first quarter of 2020 reflecting our cost management and cost savings initiatives. Looking at the second half of 2020, we expect our gross margin to continue to improve, benefiting from revenue lift from higher customer volumes, particularly in the healthcare and payment and from our continued cost management including reducing stranded costs associated with our transition revenue. SG&A expenses for Q2 totaled $47 million, down 8.2% year over year and represented 15.3% of revenue reflecting reduced revenues that was offset by our cost saving initiatives.

Depreciation and amortization expenses was $22.8 million, down $2 million year over year. We expect our D&A expense to continue to decline in the second half of 2020 driven by lower capex levels. Operating loss for the second quarter of 2020 was $5.1 million compared with operating income of $5.7 million in Q2 of 2019. The year-over-year decrease in operating income was primarily due to the lower revenue and gross profit offset by our cost saving actions.

Interest expenses went up by $3 million in the quarter, partly driven by the interest cost on our AR facility including a catch-up adjustment from the prior quarter. Turning to EBITDA and adjusted EBITDA. In Q2 of 2020, we generated EBITDA of $19.3 million, down from $27.9 million in the prior-year period. Adjusted EBITDA for the second quarter was $43.1 million compared with $44.4 million of the prior quarter and $64.9 million in Q2 of 2019.

Our adjusted EBITDA decline was just $1.3 million sequentially, despite a $58 million decline in our revenue reflecting strong focus and execution on our cost saving initiatives. Our adjusted EBITDA margin for the second quarter of 2020 was 14%, up 190 basis points sequentially from 12.1% in Q1. Excluding pass-through revenues and the low-margin client exit, our Q1 2020 adjusted EBITDA margin was 17.1%, up 210 basis points from Q1 of 2020. Our largest adjustments to arrive at adjusted EBITDA, included noncash and other income and charges, transaction and integration costs and optimization and restructuring expenses also call less O&R expenses.

We discuss the add-backs to adjusted EBITDA in more detail on Slide No. 9. Our adjustment for O&R expenses totaled $11.7 million in the second quarter and $24.7 million in the first six months of 2020. Our first half 2020 O&R charges are down approximately $17 million year over year compared to the first half of 2019.

Looking at the second half of 2020, we anticipate O&R expenses to land between $15 million and $20 million, implying a total of $40 million to $45 million for full-year 2020. We recorded $4.8 million of transaction costs in Q2 of 2020 and $9.2 million in the first six months of 2020, up by $3 million and $6 million as compared to respective periods in 2019, respectively. The increase was primarily from onetime fees related to the amendment of our trade agreements and recent asset sales. We expect our transaction costs to decline in the second half of 2020 to the $6 million to $8 million range.

Finally, we had noncash and other income adjustments of a positive $7.8 million in the second quarter and a negative $20.8 million in the first six months of 2020. This includes the onetime $35 million gain on the sale of our TBG business. We expect our second half 2020 charges in the category to decline to between $8 million and $10 million. Moving to Slide 10.

This slide illustrates the strong progress we have made in the second quarter with improving our margins and setting the stage for a continued upward trajectory in our margins in the second half of 2020. As you can see, our gross profit and adjusted EBITDA margins reached a low point in the first quarter of the year reflecting COVID-19-related volume impacts and stranded costs associated with our transition revenue. In Q2, as we noted, we delivered 148 basis points of gross margin improvement and 190 basis points of adjusted EBITDA improvement, 210 basis points when accounting for foreign currency impact despite the sequential $58 million reduction in our revenues. Furthermore, our margins in the month of June reached 2018 levels which you may recall, with 24% for gross profit and 17% for adjusted EBITDA.

This positive result on our profit margins is the direct impact of our laser focus on our ongoing cost management and cost saving initiatives. We are using the current environment as a time for continued improvement in order to exit this environment a leaner, more efficient organization. We also have additional cost-saving initiatives that are currently under examination such as work-from-home policies that may extend beyond the COVID-19 pandemic driving reductions in our facility costs, for example. Let's move to Slide 11 to discuss our liquidity.

We covered some of these items over our past two earnings call. However, I would like to refresh and build upon our prior discussion. Our total liquidity at June 30, 2020, was $106 million, up from the $31 million at year-end 2019, and our total net debt was $1.5 billion. As of June 31, our liquidity was $82 million after our $50 million coupon payment of July 15.

During the first half of 2020, as you may know, we took several steps to stabilize and improve our liquidity position. We executed on a new $160 million accounts receivable facility and completed our first two asset sales for aggregate proceeds of approximately $50 million as part of our announced divestiture plans. Now before I hand the call back to Ron, I would like to discuss our third-quarter 2020 guidance. For the third quarter of 2020, we expect total revenue to be in the range of $305 million to $312 million.

On a sequential basis, our third-quarter revenue guidance reflects improving volumes from Q2 of 2020 partially offset with the absorption of transition revenue exit. On a year-over-year basis, our Q3 revenue is expected to be negatively impacted by lower volumes compared to the quarter of -- third quarter of 2019 primarily as a result of the COVID-19 and the decline attributable to sale of our asset -- sale of our assets as well as the aforementioned exit of transition revenue. Given the uncertainty surrounding COVID-19, we are maintaining the suspension of our annual 2020 guidance. However, I would like to reiterate the factors that we expect will impact our performance for the balance of this year.

First, as discussed, we expect the adverse effect of COVID-19 on customer volumes and our financial results to have had most impact in Q2 before improving in the second half of 2020. We caution however that continuation of COVID-19 outbreaks could further impact the market and our performance. Second, we'll continue to see the impact of transition revenue as we exit these contracts and statement of work through the second quarter of -- second half of 2021. Third, the adjustment we have made to our capacity and cost structure including eliminating stranded operating costs associated with our transition revenue are expected to lead to improved gross margin and adjusted EBITDA 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 focus on our liquidity improvement initiative announced back in November 2019. As part of the initiative, the company had originally targeted $150 million to $200 million of sale proceeds from certain noncore assets. Since then, we have completed divestitures of $50 million to date as part of the announced plan and will pursue an incremental $100 million to $150 million in noncore asset sales in support of our strategy over the next 18 months.

With that, I turn the call back over to Ron. Ron?

Ron Cogburn -- Chief Executive Officer

Thanks Shrikant. Now, let's turn to Slide No. 12. I would like to briefly review our response to the COVID-19 pandemic.

As an organization, while adapting to this constantly evolving situation, our key priorities have remained the health and safety of our team and serving our customers in a sustainable way. Our rapid response teams have enabled us to quickly react and deliver nearly uninterrupted service to our customers, while also adjusting our operating -- our operational capacity to match the demand levels and to mitigate gross margin impact. We reduced our FTEs by 7% or 1,700 heads during the first half of 2020 in response to the recent demand environment. Looking ahead, based on our bench strength, we are well positioned to meet the increasing demand when volume growth is expected to recover in the second half of 2020.

We're monitoring the nature of the pandemic very closely and will continue to adapt in consideration of this evolving situation. I'm extremely proud of our team for stepping up during this unprecedented time and ensuring that we continue to provide our customers with the highest level of service delivery. Now let's turn to Slide No. 13.

I would like to walk you through a case study which is very important. This case study reviews the progression of our provider coder volumes in our Healthcare Solutions business between the weeks of March 7 and June 27. As you can see, we experienced a significant drop-off in the volumes beginning the week of March 21, as the shock of the pandemic started to take hold. Our volumes continued to decline before hitting trough levels in the weeks of April 18 and April 25 at the height of the pandemic release.

The beginning -- in the beginning of the week of May 2, we started to see the volumes gradually recover through the end of June, as patients started to adapt and return to healthcare providers for elective medical procedures. Based on these trends and what we are seeing currently in our Healthcare business, with the resurgence of elective procedures, we estimate the pent-up demand from Q2 is approximately 2 million units just in the provider business alone. Now we expect this pent-up demand to help drive our Healthcare revenue growth in the next few quarters. We also believe the recovery of our provider coding volumes is a good indication for the recovery we expect and continue to see across many other businesses where Exela is providing essential services similar to healthcare, such as payments.

These trends give us increased confidence in improving results in the back half of 2020. Now, let's turn to Slide No. 14 and conclude by reviewing our key 2020 objectives to drive improved operating income and cash flow. First, we are accelerating the alignment of businesses acquired since 2017, away from the working capital-intensive model which is the FTE-based contracts where you front the payroll cost first and then you collect the revenue later to our traditional model where the services are less FTE heavy and where the working capital need is minimal as there is no upfront cost that need to be carried before collecting revenue.

As part of this effort, we will continue to exit transition revenue by the end of Q2 2021 and eliminate the stranding costs related to these revenues by the end of 2021. We will also continue to manage our revenue per FTE metrics and optimize our headcount with the evolving demand environment in light of COVID-19. Exela has an increased focus from management down the line to maintain our stable position and prepare for incremental profitable growth in a post-COVID-19 environment. Second, and closely related to the first goal, we are focused on driving growth of our core business to achieve target gross and adjusted EBITDA margins like we experienced in 2018.

This includes expanding with existing and new customers within our banking, financial services, insurance and healthcare industry segments where we provide mission-critical solutions. In addition, we will continue to convert strong demand for our work-from-home solutions, such as home office which means you can work from any place including DMR as part of the new sales. We are also expanding our sales effort with our newly launched solutions like our human capital management and most recently what you saw DrySign. Our year-over-year increase in these new business signings is a trend, we believe that illustrates our focus on this matter.

Third, we will look to achieve a total liquidity target of $150 million. As part of this effort, we will continue to exit certain nonstrategic businesses via asset sale. Our goal is to raise an incremental $100 million to $150 million of proceeds through this process for a total of $150 million to $200 million. In closing, we are pleased with our better-than-expected second-quarter results in light of the challenging backdrop.

Our expectations for a return to the normalized volumes in the second half of 2020, combined with the continued focus and execution of our cost savings initiatives, will produce continued positive results. We are confident that our unique end-to-end business process automation solutions and our deep domain expertise will enable us to gain market share in this uncertain economic environment. I'm incredibly proud of all of our global team members for their commitment to Exela into the customers we serve. This concludes our formal comments.

Operator, with that, please open up the line for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question today comes from David Foropoulos from Unum. Please go ahead with your question.

David Foropoulos -- Unum Group -- Analyst

Hey Thanks. Thanks for the color guys. So can you give a little more clarity? I'm just -- so you have a 7% reduction in headcount. Is that permanent or -- it looks like possibly these are furloughed workers.

I'm just curious as what the economics there are. Are people getting paid still on furlough or are those permanent reductions?

Shrikant Sortur -- Chief Financial Officer

David, thanks for the question. The 7% that you're looking at, there is mostly furloughed and as we call on bench. They are not getting -- no full payment being made to the employees. It's the flexibility that we have or a better term is that's how we do the operational optimization, particularly for Q2.

That's how we manage the activity levels for revenues.

David Foropoulos -- Unum Group -- Analyst

So as your volumes increase, will these -- theoretically, these employees come back on the payroll? Kind of like...

Shrikant Sortur -- Chief Financial Officer

Absolutely.

David Foropoulos -- Unum Group -- Analyst

OK. OK. You have some flexibility there. Great.

So second question, a follow-up I have on the gross profit margins, and I guess, two questions. Can you talk about -- you talked about the cadence as you went through the quarter that they improved pretty meaningfully as we exited June. Can you review that? And I'm just kind of questioning to as part of double part of this gross profit margin question is, what would the -- can you provide like the impact from stranded costs this quarter on that -- your gross profit margin percentage? Thank you.

Shrikant Sortur -- Chief Financial Officer

Yeah. David, again, if that's -- we have -- let me say it this way. We do not have a specific breakout for the gross margin impact from the stranded cost. Obviously, there are stranded costs that we are working on getting it out of the system, right? But let's focus on -- OK, last quarter, when we talked about this, we kind of said improving gross margins were a paramount important for us.

It's also driven by focusing on profitable revenue, not just top-line growth without the results and bottom-line impact. Now, apart from the optimization impact that you've talked about, apart from having a laser focus on wanting to make sure that the cost -- our cost structure is in alignment with the revenue that we think should be the ideal and to grow the gross margins from 1% to 2% to 3%. Again, I'm not going to give a particular range. But again, as I said in the last call, we knew we were at higher margins in the past, going from 26% margins to 24% to 20%, Q4 of 2019 and Q1 of 2020, we were at 20% margins.

We are clear that we -- that trend has to reverse. Very glad that in Q2, it's now back up 21.4%. And in the current world that we are in, where we are more focused on weekly and monthly and whatnot, you'll see that, as I explained on my prepared remarks, May and June has been very pleasing that we've had almost 24% margins. This goes back to, one, as I said, optimization -- optimizing our -- operational optimization; number two, cost savings initiatives.

Yes, related to the transition revenue, stranded costs are coming down. Since there's potential cushions on stranded costs and what it is, I'll give you an example where not just the headcount, we also could have facility-related costs, our operating costs that are either mandated base contracts or in the nature of fixed element to it that will come off slowly. So it's kind of long answer, but yeah.

David Foropoulos -- Unum Group -- Analyst

Right. Now to be clear, you exited in June at 24% gross margin there?

Shrikant Sortur -- Chief Financial Officer

That is correct.

David Foropoulos -- Unum Group -- Analyst

Thank you.

Operator

And your next question comes from Anton Schutz from Mendon Capital. Please go ahead with your question.

Anton Schutz -- Mendon Capital Advisors Group -- Analyst

Yes. How does work-from-home initiatives really affect your firm as well as your clients? And what does it look like once we're past the worst of COVID-19? Is there a possibility that work from home could be a positive contributor ongoing as well as new business initiatives picking up?

Ron Cogburn -- Chief Executive Officer

Anton, this is Ron. Those are great questions. So at the end of the day, work-from-home initiatives demonstrated the flexibility and the strength of the platforms that we currently have. Like many companies, we were able to pivot at the height of the pandemic and push workers to, in geographies where you could not come to an office, to a home environment.

So we have built in certain amounts of efficiencies. We have what we call home office applications, kind of like our Digital Mailroom, kind of like DrySign that you just saw that was launched which specifically target the efficiency of a homeworker or a remote worker, let's call them a remote worker because they don't have to be sitting at their house, they can be anywhere and be able to facilitate and use our platforms. But when you think about post-COVID environment which we're all anxiously awaiting for that day, there certainly will be consideration on our part to the efficiency to the cost benefit for being able to have a workforce that can operate remotely at or above our current efficiency levels and to continue. Our customers have the same conversations.

Some of our customers came to us early on and said, look, we're not going to open our offices until Q4 of 2020. Some have said -- and you've read about, some have said, they're not going to open until Q1 of 2021. So the biggest thing they have, the biggest challenge is, the receiving and they're sending of mail. So our Digital Mailroom solutions stepped up.

And the last figures I saw which I think are public, we're almost at 100,000 users now just in the Digital Mailroom environment. And it's all as a result of our customers, their employees saying, look, we can do this from a remote location, and this is a tool that makes a difference.

Anton Schutz -- Mendon Capital Advisors Group -- Analyst

Excellent. Thank you.

Operator

Our next question comes from Allen Kato from Beach Point Capital. Please go ahead with your question.

Allen Kato -- Beach Point Capital -- Analyst

Hi. Thanks for taking my question. I guess, first, when I look at headcount from Q2 and to Q1, it looks like that declined by about 1,000, even including the bench of people at the end of Q2. So is 21,000 the right kind of new normal to think about?

Shrikant Sortur -- Chief Financial Officer

Allen, this is Shrikant. Let me take that question. It is the new normal. But then, as you know, right, if volumes were to come back to pre-COVID levels obviously there's going to be a adjustment one way or the other.

We will still continue to be focused on cost savings, cost management initiatives to bring in efficiencies as far as utilization goes, but I wouldn't want to peg onto that number. It's at this -- at the current volumes, that's a good number to think about.

Allen Kato -- Beach Point Capital -- Analyst

Got it. Sorry. So if revenues were to recover, would it -- is there a possibility you'd have to rehire around 1,000 people potentially over time?

Shrikant Sortur -- Chief Financial Officer

Yeah. Like I said, I don't want to comment -- say 1,000 as a number. It's going to be in line with the volume increases that we see.

Allen Kato -- Beach Point Capital -- Analyst

OK. Got it. Got it. And then I think in the Q, you guys mentioned that August 7, liquidity was around $78 million.

So it looks like that's offset most of the July coupon payment, but it's down versus $82 million at the end of July slightly. So should we interpret that as kind of a spike in receivables creation or partially a function of timing on when the receivables and payables are made intra-month?

Shrikant Sortur -- Chief Financial Officer

That's exactly what it is. It's working capital movements.

Allen Kato -- Beach Point Capital -- Analyst

OK. Got it. And then on the EBITDA margins, should we think about 14% as a baseline and grow from there with the add-backs being O&R transaction costs and other charges being kind of $14 million to $19 million per quarter based on the slide?

Shrikant Sortur -- Chief Financial Officer

That is correct. Allen, if you can think about it again we have not guided, but let me put it this way. There's enough material on the earnings deck, where you could look at it. You look at a normalized data.

And to your point, yes, that's the baseline right now other than onetimers. From our perspective, expectations are it'll go up from there.

Allen Kato -- Beach Point Capital -- Analyst

Got it. And I think the previous caller asked about this, but if you can't give us the margin impact of the stranded costs, is there any estimate or quantification you can give on the approximate dollar amount that's still embedded in the business?

Shrikant Sortur -- Chief Financial Officer

OK. We have talked about this for a couple of quarters, right? So let me give you a very quick small example. But when it comes to transition revenue, I'll talk about the revenue first and the related stranded costs next. When it comes to the transition revenue, it's a certain process that we follow.

We look at individual gross margin of customers. We have a threshold that we won the gross margins to be at. It's often on a customer-by-customer basis. And this can differ from each of our line of business or it could -- you could factor in things like what's the future contract value.

Once we know what it needs to be, we work with the customer to optimize the margin mix, right? That's our goal. We want to grow as a business as well, quite honestly, more than the revenue growth. Now our focus is all on gross margin growth and liquidity growth. With that in mind, when we work with the customers on optimizing the margin mix, sometimes it works, sometimes it's not.

It's usually mutually agreed to transition or exit. It's an amicable transition. In a situation like that, I would like to take the example of LMCE, right, to explain. The headcount or the personnel spend is the easy part.

Transition revenue goes away. There's a timing impact. It could be a month or two later. Usually, the headcount is -- tends to drop.

In the LMCE example again I do not want to use a general example and make it specific, but for -- to articulate this better, let me unpack this. In a situation like LMCE, let's say it was a customer that was involved in the print facility. We have certain operating costs. It could be facility costs, utilization, maintenance, lease commitments.

When we exit that revenue, the lease cost, the equipment, the maintenance, none of this is actually going away. We have two or three options there, bring in higher-margin customers to build that capacity or absorb those costs for a certain longer period until we can either consolidate the facility or figure out, out of the way to exit the -- take the stranded cost out of the system. So that being the backdrop, that's why when a question like what's the stranded cost impact on your margin, it's not really a function of a simple percentage. It varies.

It's like there's a certain range within which we work.

Allen Kato -- Beach Point Capital -- Analyst

OK. Got it. So it's kind of fluid and depends on the individual customer contracts as to what you can and -- potentially get in terms of gross margin. OK.

Shrikant Sortur -- Chief Financial Officer

Correct. Correct.

Allen Kato -- Beach Point Capital -- Analyst

OK. Got it. And then circling back to liquidity, last question. So you talked about working capital being kind of seasonal in the decline from the end of July to August 7.

But within the month of July, I think you guys ended June with $92 million of liquidity, roughly. And then you paid the $50 million bond coupon. So I guess how did liquidity kind of snap back so quickly to at the end of the month? Is it just a lot of free cash flow or receivables collection? Any color on that would be helpful.

Shrikant Sortur -- Chief Financial Officer

It's a mix. It's a mix. It's free cash flow. It's working capital swings.

And you may have seen on the 10-Q, we have availability in our facilities as well. In the Q, the $78 million was split between cash and the facility. So you will see that our revolvers tend to -- revolvers -- our availability under facilities tend to fluctuate as well. It's a combination of all three.

Allen Kato -- Beach Point Capital -- Analyst

Got it. That's all I had. Thank you.

Shrikant Sortur -- Chief Financial Officer

Thanks Allen.

Operator

Our next question comes from Howard Yim from Avenue Capital. Please go ahead with your question.

Howard Yim -- Avenue Capital Group -- Analyst

Good morning Ron and Shrikant. Thanks for the question. Hope all is well. Just a follow-up question on that August 7 liquidity for the Q on Page 8.

It says that the additional source of liquidity of $35.8 million from borrowing facilities. And then a few lines down, it says that also as of August 7, the company has fully drawn on the remaining availability under the AR facility. So just to clarify, as of August 7, is that $35.8 million remaining capacity from the AR facility or is it for something else?

Shrikant Sortur -- Chief Financial Officer

Howard, first of all, doing well. Thanks for asking. Yeah, it is but AR is slating down just in the U.S. Let me just clarify.

It's our global availability under other facilities as well.

Howard Yim -- Avenue Capital Group -- Analyst

Got it. So as of -- OK. So just so maybe I have it correct. So as of August 7, is your AR facility fully maxed out?

Shrikant Sortur -- Chief Financial Officer

I'll have to double check. The way it works, our borrowing base fluctuates every day, Howard. It depends on the AR collections and the borrowing base and the related loan availability. Technically, there are days when we can borrow on the AR facility, and maybe we don't.

I don't have a breakup from the $35 million as to how much was available from the AR on that specific day.

Howard Yim -- Avenue Capital Group -- Analyst

Got it. Maybe I'll follow-up.

Shrikant Sortur -- Chief Financial Officer

Sure. Sure. Yeah. Yeah.

Operator

And our next question comes from James Baglanis from ExodusPoint. Please go ahead with your question.

James Baglanis -- ExodusPoint Capital Management -- Analyst

Hey guys. Thanks for doing the call. One question for me is just can you talk a bit more about the Mastercard and Vocalink initiative? And just kind of how we think about that and the potential for it in both the short term and the long term? And then I'll follow-up from there.

Ron Cogburn -- Chief Executive Officer

Yes. Thanks, James. This is Ron. So we're really excited about this relationship.

I think you probably read recently where Pay.UK had validated the Mastercard Request to Pay platform that we provide all of the technology to in terms of development to all the U.K. banks. So our current agreement is focused to be the first to market with this -- with the U.K. banks for B2B and B2C e-commerce.

Exela is going to offer these solutions to its customers in the U.K. as well. And then we have plans to host these solutions -- same solutions in other markets. We will have a broader update a little bit later on all the plans we have in terms of these kind of digital assets and things like that, about the rollouts in other countries and the other forms of payments.

James Baglanis -- ExodusPoint Capital Management -- Analyst

OK. And -- understood. But I guess, how do you get paid on this? Is it a transactional-based revenue stream or more of a subscription to your customers?

Ron Cogburn -- Chief Executive Officer

That's a good question. So we have -- this is called business-process-as-a-service. So you have a SaaS component and you have a service component. So there's a subscription base as well as a transactional base.

James Baglanis -- ExodusPoint Capital Management -- Analyst

Got it. OK. And I guess one more on that too, is, should I think about this as, as you expand to new geographies going to other markets where I guess Vocalink before Mastercard bought it had a large presence? Does the expansion look like that or am I just getting too far ahead of myself here?

Ron Cogburn -- Chief Executive Officer

No. No. I think it's the right question. So we have had a relationship with Vocalink for many years.

And we have gone to the different geographies with them when the opportunities have presented themselves. With the acquisition by Mastercard, this opened up a larger footprint for us. So we're -- we have customers in 50 countries right now. So we're excited about, first, going to the customer base that we have.

And then if there are other opportunities to partner with Mastercard, Vocalink in a geography that we're not currently serving, certainly, we're going to look at that.

James Baglanis -- ExodusPoint Capital Management -- Analyst

Make sense. And then last thing for me is, do you envision this being a bigger B2B product or a bigger B2C product?

Ron Cogburn -- Chief Executive Officer

Well, I think what you'll see is B2B has been sort of our bread and butter for lots of many years. So the rollout of the digital assets like DrySign, for instance, so that's clearly going to be a B2C play because we've got lots of information that has enabled the consumer, if you will, to be able to function in environments that are remote or distance or home or wherever they might be. So we look forward and you can look forward to later this year more announcements around these digital assets and our plans to market those.

James Baglanis -- ExodusPoint Capital Management -- Analyst

Great. Thanks so much for the thorough answer and looking forward to future updates. I think the emerging payments angle is really interesting there.

Ron Cogburn -- Chief Executive Officer

You bet. Thank you.

Operator

And ladies and gentlemen, at this time, we'll end today's question-and-answer session. I'd like to turn the conference call back over to Ron Cogburn for any closing remarks.

Ron Cogburn -- Chief Executive Officer

Thanks Jamie. We really appreciate everyone participating today in the Q2 call. We appreciate the questions. As always, there's an open invitation to reach out off-line, if you didn't get your questions answered.

And we look forward to seeing everybody on the Q3 call later in the fall. Thanks, everyone.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Will Maina -- Investor Relations

Ron Cogburn -- Chief Executive Officer

Shrikant Sortur -- Chief Financial Officer

David Foropoulos -- Unum Group -- Analyst

Anton Schutz -- Mendon Capital Advisors Group -- Analyst

Allen Kato -- Beach Point Capital -- Analyst

Howard Yim -- Avenue Capital Group -- Analyst

James Baglanis -- ExodusPoint Capital Management -- Analyst

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