TrueBlue Inc (TBI) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin.

Good day everyone and welcome to the Labor Ready first quarter 2003 announcement conference call.

Today's call is being recorded. Today we will discuss Labor Ready's first quarter 2003 earnings, which were announced this afternoon.

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 be faxed to you.

Now for opening remarks I would like to turn the call over to . 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 Rogers, Chief Operating Officer.

They will be discussing Labor Ready's 2003 first quarter earnings results, which were announced after market close today.

Before I hand you over to Joe, I ask for your attention as I read the following Safe Harbor. Please note that in this afternoon's conference call, management will reiterate forward-looking statements contained in today's press release and 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 be materially different. Additional information concerning factors, which could cause results to differ materially is contained in the press release and in the company's filings with the Securities and Exchange Commission including the report on Form 10-K filed March 14, 2003.

I will now turn the call over to Joe Sambataro.

Thank you . Good afternoon.

Today we announced the revenue for the first quarter ended March 28th increased 1.3 percent year-over-year to 172.3 million. We realized a net loss of 3.2 million or eight cents per share.

We also updated our guidance for the second quarter of 2003. Estimating revenue of 215 to 220 million and net income per share between seven and nine cents. And we reconfirmed our earlier net income guidance of 30 to 35 cents a share for this year.

We are pleased with the results. Despite the difficult economic conditions, we have continued to deliver consistent earnings and revenue growth. Once again, I applaud our team's ability to adroitly manage this company. This is the hardest working team in the history of our company. Their attention to maintaining gross margins, proactively managing projected cost increases and controlling expenses continues to sustain us for the struggling economy.

In tough economic times, customers are particularly price-sensitive. Our keen attention to customer service differentiates us from our competitors. The Labor Ready team is committed to providing the highest level of customer service. Largely as a result of these efforts, gross margins improved this quarter. Matt will expand on these accomplishments in a moment.

In February, we talked about the cost controls we put into place in the fourth quarter of 2001 and which continue to serve us well in 2002. Those same disciplined cost controls remained in place in the first quarter of 2003 and are how we achieve our operating leverage.

We continue to exceed our own expectations of a four to one return on same-store sales. That is, for each five percent increase in same-store sales, we expect at least a 20 percent increase in net earnings. In 2003 we will continue the same strict cost controls and aggressive sales efforts we implemented last year. Also significant to our results this quarter was our ability to project increases in unemployment insurance cost.

As a result, we were able to price these additional costs into our servicers early in the quarter. We also our workers' compensation costs stabilize as a percentage of revenue. This is a direct result of an aggressive program a year ago to price these anticipated cost increases into our billing rates.

Our strategy for 2003 is to continue along the same lines of controlling cost, while focusing on improving branch revenues and profitability. We are conservatively expanding our market share, opening branch offices in smaller markets as well as expanding our U.K. operations in order to position ourselves to leverage even greater results from the economy that will come.

Matt will speak more about the U.K. and our smaller market offices next.

Overall, we are pleased with our accomplishments and our ability to maintain consistent results. I would like to thank the Labor Ready team for their part in delivering the results we announced earlier today. Looking ahead, we acknowledge the struggling economy, but remained poised to meet the increasing need for temporary workers that typically precedes a full economic recovery.

We are the dominant player in a fragmented market. We have a strong balance sheet and a focused management team and we are ready. At this time, I would like to hand the call over to Chief Operating Officer Matt Rodgers.

Thank you, Joe.

Good afternoon, everyone. Earlier this quarter, Labor Ready's district managers, area directors, regional vice presidents, corporate leaders and several board members met in Tacoma to discuss the strategies and initiatives that will drive our business in the years to come.

Joe led us all in a renewal to of our commitment to Labor Ready's mission, values and vision for the future. It was a great honor to look out over the meeting room filled with talented, driven, bright and professional people from all over the world. For three days, the room was filled with energy and insight that make this company great. And then this dynamic group took that same positive energy back to the field and continued to do what they do best: put people to work.

Joe mentioned our expansion plans. We will open 40 new branches this year. To date, we have opened four branches in the U.K. I have the commitment of our U.K. team that they will open their remaining 11 branches before July 1st of this year. We are very excited about the successes of operations there.

Our business model of daily dispatch, combined with our commitment to customer service, has been well received in the U.K. by both workers and customers. Following in the footsteps of Labor Ready's very successful Canadian team, the U.K. operations team has a strong sense of pride and ownership. We will give them the support they need to make certain our expansion builds on the success they have already established.

I introduced our intention to expand into 25 smaller U.S. and Canadian markets during the last conference call. As of today, we have completed the opening of those locations. We are now very focused on ramping up their sales successfully.

The rollout of the improved branch manager compensation plan continues and will be completed on schedule in all U.S. branches by July of 2003. To review, branch manager compensation is now based on the top and bottom line financial performance at each branch. The new plan effectively rewards our managers who consistently drive sales and earnings growth. That key point, rewarding sales and earning growth, leads me to what I believe is our most outstanding accomplishment in the first quarter: significantly improved gross margins.

While other companies sacrifice profit margins to compete for shrinking market share, our gross margins for the quarter were 29.5 percent, as compared to 28.7 percent in the first quarter of 2002. Our goal is 30 percent or higher, and neither the challenges of the economy, nor the competitive pricing of others, will derail us from pursuing that goal.

To that end, we are expanding our existing branch manager training to include a course on the complexities of gross margin control. The training imparts best practices to help our branch personnel master the various elements that affect our gross margins.

We distinguish ourselves by resisting the temptation to shift from our niche into the hyper-competitive, low margin, light industrial arena. The margins we deliver require hard work on the part of a highly motivated team that not only believes strongly in its company, but also feels great about the value that we deliver to our customers every day.

We continue to make steady gains in each of our three areas of focus: sales growth, earnings growth and customer satisfaction. I am please with our progress and proud of our team.

At this time, I'd like to hand the call over Steve Cooper.

Thank you, Matt.

It's nice to be with you this afternoon. I'll be reviewing with you some of our financial metrics for the first quarter and providing some more detailed guidance for the second quarter, and actually for the year as a whole.

As previously noted, our revenue for the first quarter increased 1.3 percent over the first quarter of 2002. I'm going to give you some breakdown of some of the items that impacted the growth rate for the first quarter.

First, I want to point out that we had one less billing day as compared to the first quarter of 2002. One less billing day reduced our revenue by $2.4 million and our growth by 1.4 percent; therefore using comparable billing days, revenue increased 2.7 percent.

Revenue from branches open one year or longer increased 3.3 percent on comparable billing days. Although we operated 21 branches more than at year-end, these branches contributed less than 10 basis points of our growth since they opened late in the quarter.

Now for some insight to our revenue guidance for the upcoming quarter and for 2003 as a whole. When we spoken on past few quarters about the uncertainty and the economy, and our ability to estimate the effects of a sluggish economy on our results, although we've seen seven straight months of consistent year-over-year revenue growth of about three percent, we have seen a decline in those growth rates over the past few weeks. We continue to be cautious at this point, and our guidance reflects that caution.

Our revenue guidance for the second quarter is taken into consideration our most current trends, adjusted for what we can see, for the remaining portion of the second quarter. As mentioned we estimate revenue in the range of 215 to $220 million in the second quarter.

While this would be similar to last year's second quarter, bear in mind that in the second quarter a year ago, we serviced one large project for a customer that was outside of our normal branch activity. That contributed to approximately $5 million of revenue in the second quarter, or 1.7 percent of our revenue. Excluding that one project of a year ago, our estimated revenue growth year-over-year for this quarter is approximately two percent.

For 2003, as a whole, it's difficult to make assumptions about the economic circumstances beyond our current quarter; however with what visibility we have today, we're estimating revenue in the range of 880 to $900 million or growth of three to four percent for the year as a whole.

As mentioned, gross profit margins for the first quarter were 29.5 percent as compared to 29.3 percent in the fourth quarter of 2002, and 28.7 percent in the first quarter a year earlier.

The 80-basis point improvement over a year ago, came gradually throughout the last four quarters. Part of the improvement came through improving average bill rate nearly two percent this quarter compared to a year earlier.

One component of our cost of services is state unemployment insurance, which we saw increase over 20 percent during the quarter compared to a year ago.

We were able to estimate the increases in unemployment costs and get this built into our bill rates early in the quarter, which helped us maintain our gross margin improvement.

We're also pleased that we have seen our worker's compensation cost stabilize, which is also helping us continue our improvement in gross margins.

With the components of services under control, we anticipate further improvement in our gross margins during 2003, to approximately 29.8 percent for the year as a whole.

Selling, general, administration costs were 30.6 percent of revenue for the quarter, an improvement of 10 basis points as compared to a year earlier.

At the end of the first quarter, we had 2500 employees as compared to 2600 a year earlier. This resulted in trading 12 months revenue per employee to $351,000 from 339,000 a year ago, which is a four percent increase. Bad debt expense was 1.3 percent of revenue for the quarter which is comparable to the 1.25 percent that we experienced during 2002 as a whole.

We are pleased with the cost reductions that have remained in place in the past year and our ability to leverage our fixed costs. This was shown in the first quarter by reducing operating loss by 31 percent on a 1 percent increase in our revenue.

During the remaining quarters this year we will have additional costs related to the 40 new branches that we have opened. In addition, we will have incremental bonus expense relating to the new bonus plan we've implemented. With these additional costs we estimate SG&A for 2003 will be approximately 26 percent of revenue.

Other items impacting the net less this quarter were the increase in interest expense of $1.2 million relating to the convertible notes we issued in the second quarter of 2002 and the reduction of our tax benefit to 35.1 percent from 38.5 percent earlier.

We estimate net income per share for the second quarter will be 7 to 9 cents and net income per share for 2003 as a whole will be 30 to 35 cents which is unchanged from our previous guidance.

We entered the quarter with short-term cash and investments of $103 million versus 90 million at year end. We have continued to improve our financial position during the first quarter by restructuring some of our commitments related to workers compensation. By doing so, we moved $18 million out of restricted cash to short-term cash, in addition, to eliminating $12 million of unsecured surety bonds. Over the last 4 quarters we have increased our short-term cash and investments by $77 million.

At the same time, we reduced our unsecured surety bonds by $31 million. This improved financial position over the past year has come as a result of generating strong cash flow from operations, obtaining reductions in commitments posted to our work comp carriers and our issuance of $70 million of convertible notes.

This improved financial position has allowed us to remain self-sufficient in regard to our work comp program which is important to us in these changing and uncertain times in the insurance industry. The increase in our cash position also gives us the ability to expand our operations as the economic conditions improve.

During the quarter we purchased and retired approximately 800,000 shares. We have 1.1 million shares remaining on our current authorization. We have appreciated the opportunity to update you on our progress this quarter and provide you with some outlook on 2003. And at this time we will open up the call for any questions you may ask.

Thank you. The question and answer session will be conducted electronically. If you do have a question, please signal us by pressing *1 on your touchtone telephone. If you are using a speakerphone please release your mute function to make sure your signal reaches our equipment. Once again, please press *1 if you do have a question.

And we'll go to Jeff Silver with Gerard Klauer Investments.

Hi guys. Thanks a lot for taking my call. I was wondering if you could provide a little more color, this is Adam Rink for Jeff, on some of the individual segments, either vertically or by industry that were particularly strong and or weak in the quarter?

Steve will address that. How are you doing today?

Oh, good.

There hasn't been a significant shift in our business mix over the last year. We've addressed this a couple of times. And we - although we've expanded our operations in the U.K., the percentage of that hasn't changed much. So the mix hasn't changed much.

However, your question earlier results in - of that business mix. We've talked in the past that about a third of our business comes from construction and landscaping. And about a third of it comes from inside jobs, which would be in the manufacturing and wholesale area. And our results this quarter, you know, have been stronger in the manufacturing, the wholesale, the transportation area, than they have been in the construction. But a lot of that, as we've spoken to, has to do - that's a year-over-year measurement that we talked about.

And the economic conditions started hitting us first in the East and in the Midwest. And our numbers were down the most in those pockets of the country. Therefore, they've come back first. And our year-over-year numbers are showing up stronger, as far as geographically, in the Midwest. And that's - part of the reason is because they were beaten down further a year ago.

So we are showing some nice comeback, though, in that area. Construction has fallen off slightly, showing some concern. And that's related to California, and California is still one that is - you know, as far as geographically, one that is struggling for us.

So that's probably all we have to share in that area, . Is that what you're looking for?

Yes, that's very helpful. Thanks a lot.

OK.

And moving on, we'll take the next question from Dan Dittler with Lehman Brothers.

questions. It seems as though you priced your state unemployment accruals quite effectively in the quarter. Was there any quantifiable adverse impact despite your, it seems, accurate estimations?

Well, you know - thank you for recognizing that. We did get a price through accurately, but it was still painful. And it ultimately impacted our gross margins by about 30 basis points.

We recovered that 30 basis points in a couple of areas. One, we mentioned that our workers' compensation stabilized, and that provided 20 basis points of improvement for us. And our average rate is up to cover for the - you know, the extra unemployment costs.

So year-over-year, we continued to show improvement. Sequential quarter-to-quarter, we showed a 20 basis point improvement. Most of that 20 basis point improvement came from billing rate increases, though. And the team was able to get out early in the quarter and get that unemployment passed through.

And that appears to be holding strong. And we're pleased that the operations team was able to get that done early in January.

So assuming that you could pass through the 30 basis point from the state unemployment taxes, that could get you to 29.8 percent, assuming that everything else is held constant? Is that correct?

Well, with the trends that we've seen in February and March, yes, we do believe that we're going to get another 20 basis points or so out of our margins in the next upcoming quarter. And, really, for the year as a whole, we think that it will continue on that trend. And that's how we get the additional 30 basis points that we've talked about for the year as a whole.

It comes from continued price increases. The average bill rate continues to show improvement week over week of about two percent. So it's true price improvement.

At the same time, wage pressure, wage inflation has been flat, and that's helped out. So all of our price increases have been attributed to and helped the margins on the state unemployment increases. And as we mentioned worker's compensation being the third component there, remaining flat or down about 20 basis points at this point in time.

OK, and then the 29.8 percent gross margin expectation for, is that for the year as a whole or are you expect to get to 29.8 percent at some point in the year?

Yes, we're going to get to above 29.8 by the time we get to the fourth quarter.

But for the year overall, it will average 29.8 percent, is that?

That's our estimation at this time.

OK. Great. Thanks a lot.

OK, thanks Dan.

Thanks Dan.

And once again, I'd like to remind everyone today that that's star-one to ask a question.

And a question from Ralph Wanger with Wanger Asset Management.

Hi I see that from February, you've cut your revenue estimate by about $30 for the year.

Right.

And, but you, I gather the margins are doing enough better that we still end up about even for the, on net?

Exactly Ralph. Makes good progress like we talked about on the worker's, on the gross margin and the public components that Steve reviewed. All just keep that range.

That's a good job and I know it's hard to try to boost margins when you're revenues aren't growing is a tough task.

It was actually, yes, only a $20 million reduction in our midpoint guidance, Ralph, not 30. Our guidance was at 910 million and now it's at 890.

OK.

Midpoint guidance.

We missed you on the last trip to Chicago. Maybe we'll catch you next time.

Great.

You're on vacation they told us.

Well, so it goes.

Thanks.

I'd like to give everyone one final reminder that it's star-one to ask a question today.

There are no further questions, I'll turn the conference back over to our speakers for any concluding or closing comments.

Once again, thank you very much for attending our call, and should you have any further questions, feel free to call myself or Steve Cooper. Thank you.

That does conclude today's Labor Ready program. Thank you everyone for joining us.