TrueBlue Inc (TBI) 2002 Q3 法說會逐字稿

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Today we will discuss Labor Ready's third quarter earnings, which were announced this morning. If you have not received a copy of this announcement, please contact Tracy Woods, at 1-800-610-8920 extension 8206 and a copy will faxed to you. Now, for opening remarks, I would like to turn the call over too: Miss. Stacy Burke. Please go ahead mam.

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 third quarter earnings, which were announced this morning. Before I hand you over to Joe, I ask for your attention in reference to 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 in relation to the company's financial results and operations in the future. Although we believe that the expectations in these statements are reasonable actual results may be materially different. Additional information concerning factors could cause results to differ materially if contained in the company's filings in the Securities and Exchange Commission; including the report on form 10-Q filed on August 12, 2002. I'll now turn the call over to Joe Sambataro.

Thank you Stacy. Good morning. Today we announce that revenue for the 3rd quarter ending September 27 was 250.9 million. With net income of 8.5 million or 18 cents per share. This compares to the prior years 3rd quarter sales of 259.9 million and net income of 7.9 million or 19 cents per share. We've raised our third quarter earnings estimate to be between 15 and 17 cents from our original guidance of 15 cents. We are pleased to be able to announce that our results exceeded the high end of the range. In a moment, Matt will provide more details regarding operations and Steve will provide more details on Labor Ready's financial results. What we continue to see is progressive improvement in sales month-over-month. In the weeks of September we saw both positive growth in same store sales and later in September, positive growth while operating fewer stores than the same period last year.

We have continued to control costs, which has allowed us to realize higher earnings from increased sales dollars. As I have said before, temporary employment outperforms in an economic upturn, and I contend, Labor Ready is a leading indicator within the industry because our workers are put to work first as the economy and production increases.

The modest improvements we are seeing are encouraging. We remain cautiously optimistic. Steve will provide guidance on the 4th quarter 2002 and the year 2003. It is important to note that when projecting the 4th quarter 2002 and the year 2003 we are assuming the economy will not significantly improve or deteriorate. Our estimates assume a continuance of the current modest trends. You will need to factor in your own opinions relative to the economy.

As we have done in the past, we will update our estimates as we see the 4th quarter and the year 2003 develop. As always, we will continue to hold the line with expenses, maintaining our focus and building on the competitive advantages we believe will position us well as the market continues to improve.

I am pleased to be able to announce the resolution of WA state's audit of Labor Ready's worker's compensation premium. Under the terms of the agreement the state will deduct 139,000 from a refund owed the company under the state's retroactive rating program. The state has also withdrawn all remaining claims and agreed that there will be no further audits in 2002. The state had originally assessed premiums, penalties, and income totaling 1.2 million for '98 and '99. As part of the resolution we will work with the state to update their confusing worker's compensation codes; which certainly contributed to unintentional classification errors found in the audit and resulted in both over and under payments of worker compensation premiums by Labor Ready.

This legal success comes on the heals of two other favorable legal developments. The NH Supreme Court has overturned a $143,000.00 assessment by the state in connection with transportation fees. And the 4th Circuit Court of Appeals has upheld the position of a union held class action law suit in WV finding that Labor Ready's arbitration agreement is valid and enforceable and in accordance with Supreme Court precedent.

Overall, we are encouraged by what we have seen this quarter. Improved sales, coupled with improved cost control initiatives, an ongoing commitment to our workers, customers and employees as well as significant legal resolutions. We remain upbeat but cautious as we move forward. So far this year, we have put to work over 500,000 workers. Many of these workers came to Labor Ready after being laid off or having their hours at other jobs reduced. I would like to thank our shareholders, board of directors and employees for supporting us in our mission of putting people to work. At this time, I would like to turn over the call to Executive Vice President of Operations, Matt Rodgers.

Thank you Joe. Good morning everyone. As in past quarters we remain sharply focused on creating sales growth, increasing customer satisfaction and enhancing the profitability of our organization. It is with great enthusiasm that I report to you our progress today. The team continues to deliver steady sales growth improvement, greater levels of customer satisfaction and excellent cost controls.

Add to these components a 40 basis point improvement in gross margins and you have an impressive quarter. Our sales efforts remain well planned, organized and executed. At the local level with strong professional support from our marketing group up here in Tacoma. We are getting better each day in sales execution and every branch in our company. The team executed well and met the improved demand for our services with tremendous effectiveness. (inaudible-break in audio)

...Proud to have achieved the goals of positive same store sales growth and positive system wide sales growth. We have worked very hard to achieve these goals and the team is fired up with enthusiasm and driving hard to see how far up we can drive our sales.

On the customer satisfaction front, I am pleased to say we are meeting the challenge handed to us by Joe over a year ago when we implemented the customer care center. Joe's challenge was to have each branch be a customer care center. We have been working hard to provide each branch with the tools and training necessary to resolve customer service issues in the moment that they occur. We embrace this challenge and today our Customer Care Center volume are down significantly from the call volumes from prior quarters.

This is noteworthy because as you know, the third quarter represents our peak season. We achieve this in several ways. The cooperation of the field office personnel with the training department in the customer care center have been extraordinary. The operations team is becoming adept at resolving issues at the moment of truth. We are dedicated to meeting Joe's challenge and our progress is exciting.

On the cost control front we are as focused as ever. The same strong controls that have made us maintain and improve our earnings are in place. We are confident we have the tools and support necessary to continue driving the business in a positive direction. I am pleased with the results we have achieved in the 3rd quarter and look forward to continued improvement in sales growth, customer satisfaction, and profitability.

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

Thanks Matt. Although revenue for the quarter declined 3.5% year over year net income increased over 7%. And income from operations for the quarter increased over 16%. Year to date, through 39 weeks revenue, has declined 9% however over that same period, net income has increased over 7% with income for operations increasing over 25%. We're pleased with this strong income growth for the quarter and year-to-date. I'll be reviewing with you some of the details that support this income growth for the year.

With revenue declining 16% in the first quarter and 9% in the second and thus seeing some stabilization in week over week in the second quarter. We had estimated the 3rd quarter revenue would decline but as the quarter progress we saw slight improvement each week in our results. On September 27th we announced we would be ahead of our previous estimates and revenue would end up declining only 3.5%.

This 3.5% decline consisted of the following:

We had 7% less branches in operation this year, in the 3rd quarter vs. last year. That's 751 vs. 811. And we produced 4% increase in average branch revenue during the quarter over prior year.

As stated in previous conference calls, we intend to reverse the decline in average branch revenue. We're excited to see the average branch revenue increase by 4% this quarter. There were 563 branches open these produced an average revenue decline of 3%. This is an improvement form the first quarter of 15% and the 2nd quarter of 10%. The revenue estimates for the 4th quarter reflect the trends we saw in the later part of the 3rd quarter and the first couple of weeks of the 4th quarter.

We estimate an about 3% revenue growth for the 4th quarter to be between 216 and 222 million dollars. This is slightly higher than our previous guidance. This new guidance for the year is about 25 cents higher per net income per share than our previous guidance. This increase is due to the positive results experienced in the third quarter and the impact those positive trends have on the fourth quarter. We estimate a 3% revenue growth in the 4th quarter. As this is when we will be operating close to the same amount of branches we did a year ago.

For 2003, we estimate net income per share from 30 cents to 35 cents, which is an increase of 20 to 40% over 2002. We have a strong balance sheet with $110 million in unrestricted cash as compared to $50 million at December 31, 2001. Working capital is currently at $148 million as compared to 81 million at December 31. This $67 million increase is primarily related to the net proceeds of the issuance of convertible notes in June. Day sales in AR have improved an additional 1.5 days from a year ago to 32.8 days sales outstanding. Again, I want to emphasize the excitement throughout our organization in the future of this company. We all remain focused on the details that are under our control and we remain committed to further improving the income trends that we have seen this year.

At this time we will open up the call for any questions you may have.

Unknown Speaker*: Thank you, Mr. Cooper. The question-and-answer session will be conducted electronically. If you would like to ask a question today, you may do so by firmly pressing the star key followed by the digit 1 on your telephone keypad. We will take your questions in the order you signals us and we will take as many questions as time permits. Please press star 1 at this time to ask a question. We'll now pause a moment to assemble our Roster. We'll take our first question from Jeff Silber with Gerard Flower (ph).

Good morning. Let me congratulate you on a good job in a tough environment. I just was wondering on the number of branch count, were there any either branch additions in or branch closures during the third quarter?

Yes. Steve is looking that up for you, Jeff.

Yeah, they are minor, Jeff. Each quarter, and this started actually in quarter two, we had a slight number of openings and a slight number of closings. During the third quarter, we opened three branches and closed seven. So we ended the quarter with 749 branches.

And I'm just wondering what you guys are assuming in your model for both the fourth quarter and for next year in terms of branch -- I guess net branch openings?

Unknown Speaker*: Well, right now we -- as we've talked -- the fourth quarter we don't anticipate operating a net increase in the number of branches. If there's any openings and closings, it will be a net number. This has it do with the operations team, truly not the operations in each locality we operate in each market, making sure we're in the right locations, and moving into 2003, we haven't given guidance on the number of branches yet.

Okay. In prior quarters, you guys had given out same-store sales numbers. I was wondering if we could get that as well?

Sure. We talked in the call just a little earlier about the stores that are three years and older, which is a group that we've been focused on throughout the year, and we're really pleased that that group improved, like I said, from 15% decline, 10% decline down to about 3%. And the same store group is also showing that same improvement, and it was primarily flat for the quarter, .3% negative in same-store sales for the quarter. As both Joe and Matt mentioned that indicator went positive towards the end of the third quarter. So we anticipate seeing that positive during quarter four.

Great. One more, then I'll let somebody else jump on. In terms of worker's compensation expense, I was wondering if you could talk about how that trended during the quarter.

Unknown Speaker*: Yeah, it's right on the projection that we've supplied. And its part of the reason that Gross margins have increased is we haven't increased the cost of worker's compensation since February. And the operations team has been working hard to get that past through to our customers, as shown in the .4% increase in our Gross margins.

Okay. Great. Thank you very much.

Moving on, we'll take a question from Charles Gunther with Wells Fargo.

Good morning. Couple of questions. Do a little color if you can do it to us on Gross margins. For example, in the third quarter, could you talk about the sequential change in Gross margins month by month and the same thing what you've seen so far in the fourth quarter? In other words, they obviously must have picked up a little bit month by month through the quarter. You seem to be still seeing that. (inaudible) the fourth quarter.

Unknown Speaker*: Yeah. We don't really share our month-to-month results because it's so hard to compare year-over-year on any given week. As I mentioned, in the second-quarter conference call we'd seen our margins improve right towards the end of the second quarter. And that jump that we got really held strong throughout most of July and August, which are -- a couple of our peak months. Again we've seen a surge forward towards the end of September and here in the first couple weeks of October that help us feel confident with the new guidance of 29.5% that we've given for the fourth quarter.

Okay. That's very significant. And the other question I wanted to ask you is sheer nuts and bolts, what should be the fully diluted share count for the fourth quarter?

Unknown Speaker*: We -- right now off the projections that we have, we -- the offering would be anti-diluted. So the share count we're working off of for the fourth quarter will be approximately 42 million shares.

As opposed to your 50.7 in the current?

Unknown Speaker*: Excuse me?

Well, your fully diluted share count in the quarter you just finished was 50.76, and you're saying you're going down to the low 40's?

Unknown Speaker*: Right. It really depends on whether or not it's anti-diluted. (Inaudible) definition of GAAP. If it's an approximately -- the cutoff point is around 8 cents, Chuck. Any income over 8 cents it becomes diluted. Anything under that it's anti-diluted. So it's just a yes or no question of whether you add the shares in or not. And we're anticipating with the projections that we've given at 6 cents a share the offering will be anti-diluted. And therefore the fully diluted shares would be approximately 42 million. If our earnings are above 8 cents, the offering becomes diluted. And the out standing shares there would be an additional 9.6 million shares.

Okay. Thanks a lot. I had some question, that shed some light on something that always confuses me. Appreciate it.

Once again. Press star one to ask question. We'll take a question from Dan Diddler from Lehman Brothers.

Good morning, gentlemen. Congratulations also on a great quarter. One follow-up regarding Gross margin. Could you provide a timetable as to when you plan to get back to your 30% target Gross margin?

Unknown Speaker*: Well, we have to go off the guidance we've given so far. We're comfortable we'll be at 29.5 or better in the fourth quarter, and it's -- as you've seen throughout 2002, it's been hard for us to predict what to give in pricing pressure is in each given market and how this comes on. So there is a strong commitment from the operations team to drive forward and increase the bill rate in each market as fast as they can. And the only commitment we've given is that we're going to charge forward from that 29.5. Using that as a benchmark where we see ourselves in Q4 into '03. So how fast we ran it from 29.5 up to 30 and 30 and above in '03 is dependent on factors it's hard for us to predict at this point. But there's a lot of commitment. There's a lot of controls and reports in place that monitor this for us on a weekly basis.

Fair enough. Would you say, then, that your 40 basis points sequential increase was above what you had initially planned or right in line with what you projected?

Unknown Speaker*: It's close to what we had planned. We were working for a half a point -- or half a percent actually improvement in each quarter. So this was our best quarter in making that surge forward and we're comfortable with the trend line and where we see it going.

Terrific. And one final question, I guess it would be somewhat related to Gross margin, and that is, have you had any discussions with your actuaries regarding your projections for worker's comp expense in 2003, and is that different than what you had previously been forecasting?

Yeah, we monitor that each quarter throughout the year, and so far the reports that have come in matched where we started at the beginning of the year. So we don't see any fourth quarter adjustments. We're happy with the accrual rate we're at, we predicted at the right level, and we stay really close to the actuaries and keep them current on our data so they can give us the best guidance as they can. Moving forward into 2003, we have not finalized where the estimates will be for 2003, but our initial indications are there won't be a significant increase from where we're currently at. That it won't impact margins in '03.

Terrific. Again, great job, guys. Thank you.

Unknown Speaker*: Thanks, Dan.

We'll now go to Steven McBoil with Lord Abbot.

Just to follow up on the Gross margin questions. Just curious, in the quarter, what did workers comp track as a percent to sales and what would be imbedded in the guidance for '03?

Unknown Speaker*: Year-to-date workers comp has run 7.9%. In this quarter, it was 8%. Now, that can change based on the mix of business that we have in any given quarter. The guidance that we gave at the beginning of the year is a range between 7.8 and 8%. (Inaudible) Moving into '03, as I just mentioned in my last comment, it may be up slightly but not significant. This 8% range seems comfortable to us now from our first indications from our actuaries.

Fair enough. And just curious, obviously, you know, if you step back and look at a lot of the macro trends, one would argue that the outlook from an employment perspective doesn't look all that favorable in the near term and granted the pay for the day light industrial is a leading indicator. Just curious as to where you are currently with respect to where you would think you would be in a typical cycle, and then also just curious as to, as the year has progressed here, what has your ability to pass on bill rates been throughout the year?

Unknown Speaker*: Yeah, you know, one of the things that we watch real closely and how the temporary help supply sector comes out after a recession. And if we're asked to predict where we're at coming out of a recession, that's a comment that we're not prepared to make, because, as much as we'd like to be economists, we're surely not. All we can do is measure how we're doing week over week. We know that Labor Ready's performance has been equal to or better than the temporary help supply sector on a monthly basis. If you look at where that help supply sector -- how it performed coming out of recessions in the '80's and in the '90's, in the early '80's, it performed at a Gross rate of 35%. And in the early '90's it performed at a growth rate of about 25%. During the mid '90's, the temporary help sector grew 15% consistently over about a six or seven-year period before it fell off and shrank at this 10% level for two years in a row now. And as we've seen it back to a flat level, the question then is, where do we see it going forward? And it's hard for us to predict. We can only look at our own results, and that's why we stay committed to the things we can control and try to react to those things that are out of our control the best we can. We're excited about the fact that this industry has the ability to grow at 15% and after recessionary periods, it's grown in excess of that.

That's great. And the -- just with respect to the bill rates, would you make the argument to the extent that your goal has been to increase Gross margins on a 50 business basis point quarterly perspective that there is pricing power here, that you've been able to push through bill rates to a certain point?

Unknown Speaker*: Our goals, Steve, have been to push back to our historical levels of 30%. We probably don't expect the - to be materially beyond that. There's still pricing pressures in the marketplace. But what we've been doing for this past year is recovering the worker's compensation increases that were initiated in February. Wouldn't want to leave the impress impression that it's the going to go from 30 to 40 or something like that. Our goal is to get back to 30. We think that's a fair return for our services and competitive in the marketplace.

Great. Congratulations on the quarter

Unknown Speaker*: Thanks, Steve.

We'll now take a follow-up question from Jeff Silber.

Thanks, uh, actually I have a few. Tax rates came down 2nd quarter to 3rd quarter and I noticed the same thing happened last year; and I'm just wondering what kind of tax rates we should be using for modeling purposes both for next quarter and next year?

Unknown Speaker*: Yeah, the third quarter is the time that we do our true up for our return and try it make sure we know where we're going to be by the end of the year, and we're comfortable with the rate we're at for this year. Going forward we're comfortable with the 37% tax rate.

Okay. Great. And also just for modeling purposes, the amount of interest on the convert, I think you said it was roughly 1 point 1 million. Is that correct?

Yes.

Okay. Great. And one more. From a balance sheet perspective, I don't know if you have the details in front of you, but if we can just kind of compare your amount of pledged assets against future worker's comp claims to the worker's comp liability.

Unknown Speaker*: Sure. Hang on second. Gotta get to the right page, Jeff.

Alright, thanks, I appreciate it.

Unknown Speaker*: We currently have -- $110 million of commitments pledged against an approximate $80 million liability.

That ratio has not changed from the last quarter, and that difference, as we've talked about in the past, represents the discount that we've taken in accordance with GAAP. And pledging collateral ahead of when we bring the obligation on for our insurance companies. They want to make sure we have the commitments ahead of when the obligation comes on. And then a slight portion of that is part of bringing the collateral down once we've paid down the obligation. So there's a balancing act between the two things that will always create a gap in those three items. One the discount, two pledging collateral ahead of the current obligation and three bringing the collateral down once we make our payments with past carriers. And we're pleased with the trends that we have there and that that gap hasn't widened.

Fantastic. One more quick one. Do you have EBITDA for the current quarter?

I don't have that in front of me. I had it calculated. I wrote it down and I didn't bring it in here. It's pretty basic off the press release that we had. The approximately $17 million for the quarter. I don't have the exact number in front of me.

I just want to know if I can add (inaudible ) DNA (ph) to income and operations-- and it sounds like I can.

That's the number.

Thanks so much.

We have no further questions at this time. I'll turn things back over to you

All right. Well, thank you for attending. And should anybody have any further questions, please feel free to give Steve or I a call. Thank you very much of.

That concludes today's teleconference. We thank you for your participation.