TrueBlue Inc (TBI) 2002 Q1 法說會逐字稿

Good day everyone and welcome to Labor Ready's first quarter earnings announcement conference call. Today's call is being recorded. Today we will discuss Labor Ready's first quarter earnings which were announced this morning.

If you have not received a copy of this announcement, please contact Tracy Wood at 1-800-610-8920, extension 8206. Once again that's 1-800-610-8920, extension 8206 and a copy will be faxed to you.

Now, for opening remarks I would like to turn the call over to Ms. . Please go ahead.

Here with you today from Labor Ready is Joe Sambataro, President and Chief Executive Officer, Steve Cooper, Chief Financial Officer and Matt Rodgers, Executive Vice President of Operations. They will be discussing Labor Ready's first quarter earnings which were announced this morning.

Before I hand you over to Joe, I ask for your attention as I read the following Safe Harbor. Please note that in this morning's conference call management will reiterate forward-looking statements contained in the press release and may make additional forward-looking statements relating to the company's financial results and operations in the future. Although we believe that the expectations reflected in these statements are reasonable, actual results may materially be different.

Additional information concerning facts which could cause results to differ materially is contained in the company's Form 10-K filed on April 1, 2002 as well as other SEC filings.

I will now turn the call over to Joe Sambataro.

Great, thank you Stacy. Good morning. Today we announced that revenue for the quarter ended March 29th, was 170 million, with a net loss of 3.6 million, or 9 cents per share. I would characterize this quarter as stronger than expected. We exceeded our expectations and the consensus estimates of the analysts.

We spent the quarter hard at work putting people to work and providing the dependable, temporary labor our customers demand. As a result of revenue that was slightly higher than anticipated and continued cost control, we were able to post stronger than expected earnings results.

What we are seeing is an improving trend in revenue each week. There are signs of recovery in the economy although there are pockets of the recession that still remain. This recently improving trend combined with stabilization over the last two quarters, is encouraging.

In any economy, we are always looking for opportunities to drive the business forward. We are encouraged by the response in the market place, the sales program we rolled out this quarter. These significant efforts made in the field are clearly delivering results.

We also continue to focus on controlling costs and operating efficiently. We opened six branch offices this quarter and closed ten for a total of 752 operating branches. I say it every quarter, but it bears repeating. There is strength in Labor Ready's business models. When we execute the plans we get results. When we focus on putting people to work faithfully and providing the work force our customers demand, the result is increasing revenue.

The strength of our business model and our talented team, the heart behind who we are and the service we provide, continue to propel the company forward. We are encouraged by the results of the first quarter. Looking ahead, I would describe us as upbeat but cautious as we move forward.

At this time, I'd like to hand the call over to Executive Vice President of Operations, Matt Rodgers.

Thank you, Joe. Good morning everyone. Labor Ready's operating team has been dedicated to creating sales growth, driving customer satisfaction and enhancing the profitability of our organization. These three critical points of focus continue to be the bedrock of our strategic plan and our tactical approaches.

In the first three months of this year, we have observed small, but steady improvements in our sales growth trend. In the first two weeks of April, these trends have continued. Sales declines appear to have bottomed out and we are slowing trending upward. In January, we completed the biggest sales competition in the history of our organization. Starting in December and running through January, our operations team completed well over one million sales calls across the United States.

This was followed in February with operation customer retention. We spent February in front of 20,000 of our best customers, completing customer satisfaction surveys.

These surveys gave our customers the opportunity to communicate with us about how we are doing. What we can do to become more effective and what other services they would like Labor Ready to provide. It is always reaffirming to hear from our customers. They're the first ones to tell us that we are very good at what we do. That came through loud and clear.

But more importantly, our customers really opened up to us and our research has given us a database of information. This information will be used to sharpen our focus on providing unsurpassed customer satisfaction in the quarters ahead.

Based on earlier customer surveys, we learned that our customers want better access to their account information. We responded. In March we launched a program called customer connection. Our operations team completed extensive training designed to familiarize them with the Web-based services we offer to our customers.

Once we were trained, we went to work signing up our Web enabled customers providing them access to our account management tools online. As more of our customers embrace technology, more of our customers will have access to their accounts through the Web.

Also, our front line operators are now much more comfortable promoting the value added benefits that our technology can provide. The operations team continues to focus managing our business profitably, exceeding our own expectations in the first quarter as the strength of the team and the power of our resolve.

These are just a few of the operations teams' accomplishments since our last call. The second quarter is starting out with the same dynamics with which quarter one ended. sales growth improvements each week continued focus on customer service, and profitability.

I am very pleased with the results that we achieved in the first quarter and look forward to the continuing improvements in same store sales, profitability and customer service as the year progresses.

At this time, I would like to turn the call over to Steve Cooper.

Thanks, Matt. Congratulations, Matt, on the things you said here in the operating results that were . I want to walk through four categories with you and then talk about the balance sheet a little bit. Those categories with be revenue, gross margins, sale and general administration expenses, and our net income. I will provide a little bit of insight on how the quarter progressed, how we see those four categories moving forward and then provide you with some reconciliation of our previous guidance of those four categories.

I've mentioned here the year over year revenue declined 16 percent as compared to the fourth quarter, it had declined 17 percent. When we last met with you on February 6th, we were looking at the January results and they had actually worsened from the previous months in the fourth quarter. We had seen January's results declined in excess of 20 percent and then as we moved into February and March, we started to see the improvement. And as Matt just mentioned, that improved has continued to hold throughout the first couple of weeks of April.

The February's results declined about 15 percent and then March's were 13 percent. And as we move into the next quarter, our guidance will hold the trends that we see of about 12 to 13 percent decline from the .

The stabilization that we talked about on the last call, we had seen that through October, November, December, and then the pick up really started mid part of February and it's holding really strong.

I want to talk briefly about the 16 percent decline and how we see that happening. During the quarter, we operated 8 percent less branches and we incurred 8 percent less revenue per branch, that's the 16 percent decline.

In the first quarter, the 17 percent decline was made up of 10 percent less revenue per branch. So, we're reflecting a 2 percent increase or less decline actually in the average revenue per branch. And as we've spoken about may times here, our focus is improving the average revenue per branch and we do expect to see similar improvements in each quarter as we go throughout the year.

The expected change in the number of branches that we intend to operate during the quarter is important for us. The decline is made up of both categories, less branches and then less revenue per branch. As I just stated, we operated 8 percent less branches in Q1 and as we move into quarter two and quarter three, we intend to also operate 8 percent less branches in each of those quarters than we had in 2001.

When we get into quarter four, that's when we will be operating branches as compared to 756 branches in quarter four of 2001, they will be flat there. And as we make consistent improvements in the average revenue per branch, that's where we'll see some growth on the top line, the overall top line will actually turn positive, as we will be operating in the same number of branches.

The same store revenue, which is those branches one year older, came in as follows, in quarter four, those branches had declined around 16 percent and in quarter one of 2002, the same store sales was negative 9 percent, we saw about a 7 percent increase and that's mainly reflected in the number of branches that were operating.

The three year and older branches includes 567 branches. That group declined 15 percent, that's compared to 21 percent in the previous quarter. So we're seeing nice improvement in our more mature branches also.

The revenue estimates, the guidance for Q2 that we've mentioned already, will be as follows, we anticipate about a 12.5 to 13 percent decline, which will put us in the range of $208 million to $212 million. That is based on the current trends that we've seen over the last few weeks.

The gross profit, the gross margin percentage that was document the quarter was 28.7 percent, that's compared to 29 percent in the fourth quarter. A year ago the gross profit margin was 29.8, so we slipped about a point from a year ago. But as you recall in our last guidance, in our last conference call I said we're at six, I talked about the increase to workers' compensation that we expected and the impact that that would have on gross margins.

We implemented increases to our customers at the first part of the quarter and we anticipated a 1.5 percent decline in margins from our goal of 30 percent, and that happened upon implementation. Our goal was to get a half a point to that back, a half percent of that back, and be at 29 percent for the quarter. We ended up coming in at 28.7, which was short of our goal, but we've seen some fruits of efforts in that area, and most recently with some changes that we're making to that implementation plan, we do anticipate getting another half of a percent of that back this quarter, so in Q2, we're anticipating 29.2 percent for our gross profit margin.

The SG&A cost was, we had a positive result there in the quarter. We had anticipated SG&A as a percent to revenue to be in excess of 32 percent for the quarter and it came in at 30.7. There are dollars there we are anticipating to be in excess of $54 million and it came in around $52 million. So we made up some nice ground there, most of that being in the salaries at the branch levels.

As we close that last group of branches in the fourth quarter, it takes sometime to get all the cost out of the system and so we were a little bit conservative on how that would work out, but the operations team executed that real nice during the quarter, and the salary costs were held in line and we came in at $52 million for the quarter, or 30.7 percent of revenue.

As we move into the second quarter, based on our historical trend, we are anticipating the SG&A cost to 27 percent of revenue for Q2, or $55 million. As I mentioned, the sales from employee is reflected in the fact that we had less employees, and that's where we really saved the SG&A. At the end of Q1, we had 2605 employees, which is down 15 percent from the prior year, and down 9 percent from the fourth. With that, sales from employee was $339,000 as compared to $321,000 a year ago. It's an improvement in sales for employee.

Quickly, reconcile back for you then the change in guidance that I just talked about. On February 6th we had guided revenue to be 164 million to 168 million, or an 18 percent decline, and we just posted 170 million or a 16 percent decline, we made up two points there, 2 percent better than we thought.

The gross margin slips, as I mentioned, we'd anticipated 29 percent and it came in at 28.7, but the good part is, is with the increase in revenue, although we didn't hit our gross margin percentage, we beat our gross margin dollars. And with the improvement of SG&A of being 30.7 versus 32.2, we picked up another point and a half there. And that resulted in beating our own expectations of a twelve-cent loss and we reported a nine-cent loss.

I'll review with you quickly some balance sheet items. I first want to talk about some attention that is out there in the accounting world right now on goodwill write-offs and let you know that we do not have any of that. We don't have goodwill on our balance sheets that we will have to write down as a result of an acquisition, and we don't have it now and we don't anticipate it in the future.

The days outstanding in receivables for the quarter came in at 32.5 days versus 34.6 a year ago, so we picked up two additional days and if you recall a year ago, we had already picked up three and a half days on that number. We're continuing to see very clean receivables, very good collection, and turning those receivables into cash as fast as we can.

The only other significant change on the balance sheet is, we've restricted an additional $18 million in cash. We've moved that from cash and cash equivalent in current assets to restricted cash in other assets. With this additional $18 million of restricted cash, we now have approximately $50 million in restricted cash that is related to our workers' compensation reserves and we use that in conjunction with our receivables to collateralize our workers' compensation program.

For the net income per share we've talked about, we just posted nine cent loss for the quarter. As we head to the second quarter, we've disclosed in our press release today that we anticipate earnings per share of being three to five cents as compared to seven cents a year ago. We are holding our range for the year for net income per share to be 14 to 18 cents.

We are maintaining our focus on building average revenue to 1.5 million. We've talked about that before and there's not a day go by that we don't focus on that. We know that that's where the leverage is. We showed it in leverage in our cost structure this quarter and we anticipate to leverage it out further. And with average revenue at 1.5 million, we continue to estimate that we'll earn in excess of a dollar per share and this does remain our number one priority.

With that, at this time, we'll open the call up to any questions you may have.

Thank you. The question and answer session will go electronically today. A question, please press the star key followed by the digit 1 on your touch-tone telephone. Once again, that's the star key followed by the digit 1.

We will proceed in the order that you signal us and take as many questions as time permits. Again, that's star 1 to .

We will pause for a moment. From , .

Matt, Steve and Joe, great job over there, impressive of quarter. Steve, hey guys, I want to ask you if you could explain the increase in workers' comp expense a little further and should we expect that this cost will increase each quarter like it did this quarter.

The workers' compensation as a percent to sale this quarter was 7.8 percent. That's a component of gross margin, that's exactly what we had anticipated and guided and disclosed on February 6th. Our goal at that point in time was to increase our bill rates to our customers because we really believed that workers' compensation is after cost. It's much like the wage rate that we passed here to our customers also.

We, upon implementation of those price increases, we knew that, with the economic conditions, that it might be a struggle. And we put a plan in place, knew that we would have to readjust that plan and that's exactly what we've done. We feel comfortable that with the readjustments we've made in the last week or so that we'll continue working neck and back. And as I previously disclosed, we'll get it back another half a point this quarter and that will get margins above 29 percent. We'll keep working it throughout the year.

Do we expect this quarter, the cost to increase, the answer is no. The 7.8 percent is all we see for the current year. And we're comfortable with that, it's all about pricing it through now to our customers and controlling on the cost side, but we do have a whole estimate for the year plugged in and we don't anticipate that to change.

Thank you very much.

Thank you Ron.

Thank you and we'll continue on with with Wells Fargo Securities.

Good morning.

Hey Chuck.

I congratulate you on your expense control which looked fantastic. I've got a couple of questions aside from that. On your gross margins and your workers' comp, which just went into it some detail, was there any geographic pattern to all that? Was it easier to put a cost on one part of the country versus another related to economic conditions locally or how do you see what happened?

Actually we have seen some differences and I'll let Matt elaborate.

Good morning Chuck. Thanks for being here today.

You're most welcome.

I, you have a really good question and the way that we try to pass this through was in the west which, you know, we knew was a strategy that had some risk assigned to it because that's currently where were experiencing the most difficulty with our growth numbers. So, but we did determine that we wanted to take that approach because of the competitive environment in the west being less competitive than other parts of the country.

What we've learned as a result of this is that we will use our national platform more effectively and balancing how we apply our flow rates. This will give us the ability to compete more effectively in the markets that have been more intensely, that are more intensely competitive.

I'm sorry, I don't fully get the message there. Did it not go over well in the west, is what you're saying?

It's much more difficult at this time to pass through a price increases in the west.

And that's because, why is that? Off the top of my head I don't think that the west is being as badly off as other parts of the county.

Well, what we're seeing across the county is, find the recovery in the Midwest, which is basically being lead by failure and the manufacturing sector, same is true in the Northeast with a notable exception of New York City and Northern New Jersey which we serve New York City from. The Southeast was pretty much passed over by the with the exception of Atlanta, and Atlanta we're beginning to see early signs of recovery in that market. The west was the last to show the signs of impact, but that impact is the strongest there right now.

OK, so it's rolling across the country and finally gotten our here.

Absolutely.

OK, I appreciate that answer. If I could hog the phone for a minute.

Sure.

On your, this is a nuts and bolts question. On your balance sheet in your long-term liabilities, how much of the 44.38 million you show is workers' comp reserve.

Steve has that number.

About 39 million.

OK, I'm off the air, thank you very much.

In the curb portion is about 27 million.

Thanks.

You bet.

Thank you Chuck.

Thank you. And we will continue on with with Lehman Brothers.

Hi, this is calling, sitting in for Adam . Thanks for taking my call. Just wanted to ask a question regarding seasonality as, you know, bill through the first quarter and enter some of your stronger quarters into the summer months, are you seeing typical seasonality as it occurred, for example, in 1999 and 2000 as well?

Yea, we watch that pretty close Dan and we do have a tracking system so we can, it helps with our projections to know where were at and for the most part we do see it following our current seasonality plan. We plan on seeing that ramp out through the summer months. What can throw that off is one or two large new customers or a spike in the weather, or different things like that. So we have to smooth those out week to week as we understand our week to week numbers. Was it a new customer, was there a change in the weather patterns, because those things impact us.

But overall, we've had very consistent seasonality patterns over the last three years and we anticipate that those will follow throughout this year.

OK. Thank you very much.

Thanks, .

Thank you. And we'll take our next question from with Performance Equity.

Gentlemen, good quarter. I have two questions for you. First question, do you anticipate any additional SG&A savings in the coming quarters?

Yea, as I was previously talking about, we saw a nice improvement this quarter.

Yea, it looks like 17 percent year over year.

Yeah, 17 percent year over year, $11 million of savings. As we talked about in our fourth quarter call, we had saved $15 million in 2001 over 2000. Most of that showed up in the third and fourth quarter. About 5 million in Q3 and 10 million in Q4 of last year. And so we anticipate in Q1, which we were anticipating about a $10 million savings, and it came in a little stronger than that, in Q2 we anticipated another $10 million savings over 2001 and then when we get to Q3, we anticipate $5 million of savings and then we'll be flat to where we started the cost control measures.

So, for the year as a whole, would be about $25 million for 2002 over 2001.

That's a significant number.

Yea, for the two year total of about being $40 million, the controls we put in place were 10 million per quarter and they went into effect half way through Q3.

Sounds great. One last question for you Steve. Restricted cash. Do you anticipate having to move more money over to restricted cash as you proceed or is that something that you've addressed and don't see additional movement of money?

I think we're there for the year. The $50 million, we won't pierce that number, now I want to talk about why we have that much there and it's in conjunction with our receivable line. Our facility is really called a security, a receivable securitization program and a letter of credit facility, so we can issue letters of credits to our insurance company. As we've done a great job in collecting our cash and reducing our , that moves the money out of our receivables into our cash accounts, but it also makes not as much to be, collateral available in those receivables. So we restrict that cash. When sales pick up throughout the summer months, the receivable balance grows, it makes more collateral available, it gets those LCs and you don't need as much restricted cash.

That's one other reason the restricted cash line grew is to support the letter of credit facility. We anticipate that the restricted cash balance needing to grow during the quarter two and three at least.

OK, thank you gentlemen.

Thank you sir. We will continue on with with

Hi guys.

Hey, morning Ralph. How are you? Ralph?

Bad area. Is salary controls hurting you?

Could you repeat the question Ralph? We lost you in the beginning of the question.

Manager turnover at the branches, that's the question.

The average age of our stores Ralph, is about four years and the average ten year of our branch managers just over two. So we've been improving that on a monthly basis.

OK, use of calculative turn over rate. Are you still doing that or is it . . .

No, because when we close stores, it's somewhat self-imposed, when we had closed the stores over the past year. We had, you know, a turn over because we closed the stores. So instead, we are focusing on the average ten year for the manager which, to us, is a more meaningful number.

OK, and the two years compares with what?

About a four year average life for the stores.

OK, we average ten year versus average life for the store, average ten year increasing or decreasing?

It's increasing. It's now 2.1 years average ten year, at the end of the fourth quarter it was 1.9

OK, great. Thinking, were there any unusual, they had a lot of warm weather around the county in the last couple quarters, has that had any one way or the other on your ?

Matt can answer it.

Yea, we've had a fairly protracted drought in the Northeast and so what happens in those circumstances is that it levels out our seasonality curb a little bit so you don't see the of demand in the summer time that you would normally see. It just spreads out when we achieve the revenue a little bit more than we would have in a normal seasonality curb.

There's more construction than usual, or how would you . . .

It doesn't necessarily increase the number of jobs going to permit and going to build, it just compresses, or decompresses the time in which those projects are built. So it spreads out the work over the year instead of compacting it into the summer months.

OK. Does that mean we're gonna get less of an increase in the summer?

I think the, in the areas that have been impacted by drought really are not going to have that significant of an impact on our total seasonality curb because they represent such a fractional amount of our revenue.

OK. Thanks.

Thank you Ralph.

Thank you Ralph.

And a reminder to our phone audience, if you do have a question, please press the star key followed by the digit 1. Once again, that's the star key followed by the digit 1.

We will pause for a moment.

And we will take a follow up question from with Lehman Brothers.

Hey sorry if you already covered . . .

Could you speak louder, we're not getting you very clearly?

Oh, I'm sorry. Sorry if I missed this part earlier in the call, but, could you discuss seasonal, or excuse me, monthly revenue trends throughout the first quarter and how they progressed throughout the quarter?

Yes, and Steve can repeat those.

Yea, I'll start back in the third quarter and kinda show you how the down turn progressed and where were at. We went negative for the first time in June of about 3 percent, June of 2001. July was negative about 5 percent, August was negative about 8 percent, September was negative 11 percent, October was negative 16 percent, November was negative 17 percent, December was negative 17 percent, and that was the stabilization that we've felt comfortable with when we talked in the last quarter. We hit October, November and December and they were level around 17 percent and that's were the quarter was posted at.

As we moved into January, the first couple of weeks of January were worse than that stabilized trend but it re-stabilized around 17 percent right in the middle of January. February was negative 15 percent and March was negative 13 percent and the last couple weeks, the trends have been slightly better than negative 13 percent, so we're seeing that improvement continue.

Great, thank you very much.

Thank you, Dan.

We also have a follow up question from with Wells Fargo Securities.

This may be the obvious, but I wanted to make sure I had it clearly, you say on the SG&A savings topic, do you really expect to save, have you SG&A to be $25 million lower than it was in 01 for the full year?

Yea, that's what were estimating right now. Our earlier guidance we felt should that we connect up to 20 million, but our current projections are at 25 million. Now we need to point out though, as revenue increases, those dollars go up, but we're going to hold the percentage down, so right now we're projecting 228 million, somewhere between 225 and 230 million.

So obviously, if you tacked on another say 50 million in revenues for fun, you just illustration. They would be fewer dollars saved in total because you had to spend a little more, right, is that what your saying?

Yea, that's absolutely right.

That's also where the leverage and the model is.

Yea, there's a portion of our cost that are variable and as revenue goes up we can anticipate that the raw dollar cost will come up, and as Joe just mentioned, there will be leverage and the percentage of revenue that we spend on SG&A will keep coming down, because there's only a portion of that estimated 27 percent that's variable.

Can you characterize that at all? What portion is variable and what portion is fixed when you take the year as a whole?

Sure, in round numbers and I won't get into a lot of specifics here, but manager compensation is variable. We have branch level compensation with the way we pay our branch managers, the more sales dollars they generate, the more compensation they get. And we also have our district managers are compensated the same way. It goes up, they make more.

Another thing that comes into play, the more revenue you have, the more bad debt you have. Now the percentage doesn't change, but the raw dollar, so really that's what we're talking about, the raw dollar will go up, but the percentage will come down. Because only a portion of that is variable. Those are the types of things that are variable. There's a few others, but those are the most significant.

At the expense level you project for the year, or the revenue level, can you say what part of your, at that level, what part of your SG&A is fixed and what part is variable.

Yea, it would be really hard for us to estimate that right now and discuss it.

I understand that. OK, well, that's my question. Thank you very much.

OK, thank you Chuck.

And yet another reminder to the phone audience, if you do have a question, please press the star key followed by the digit 1. Once again, that's the star key followed by the digit 1.

We will pause for a moment.

And there are no further questions at this time. I'll turn the conference back over to Mr. Joe Sambataro for any additional or closing remarks.

OK, thank you. And thank you everyone for attending today. Should you have any further questions, please feel free to call us. Thank you.

And that concludes today's conference call. On behalf of Labor Ready and Premier Conferencing, we thank you for your participation and wish you a wonderful day.

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