TrueBlue Inc (TBI) 2003 Q2 法說會逐字稿

Good day, everyone. Welcome to Labor Ready's Second 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 Woods (ph) at 1-800-610-8920; extension 8206 and a copy will be faxed to you. For opening remarks, I'd like to turn the call over to Miss Stacy Berg. Please go ahead.

Here with you today from Labor Ready is Joe Sambataro, President and CEO and Steve Cooper, CFO. They will be discussing Labor Ready's 2003 Second Quarter Earnings results, which were announced after market, closed 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 may make additional forward looking statements relating to the company's financial results in operations in the future. I believe the expectations reflected in the statements are reasonable, actual results may be materially different. Additional information concerning factors, which could cause the 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 10Q, filed May 5, 2003. I'll now turn the call over to Joe Sambataro.

Thank you, Stacy. Good afternoon, everyone. Today we announced that revenue for the second quarter declined slightly by 1.6%, to $215.7 million, and net income increased 51%, to $5.2 million or 12 cents per share. We are pleased at the level of positive income results despite the slight decline in revenue. The sluggish economy continues to impede our ability to grow revenue. The modest top line improvements that we saw in the first quarter stalled in the second quarter as demand for services softened. We would characterize activity this quarter as flat. However, we are encouraged by increased activity in certain markets and believe that is an indication that things will get better in the markets where we have most recently been struggling.

We continue to be in a good financial position to leverage any improvement in the market conditions. Certainly, the flexibility of our business model allowed us to adapt to the sluggish economy and fluctuations in revenue. We delivered positive income results by improving gross margins and managing operating costs, which Steve will speak to in a moment. Our results are a reflection of the strength of the Labor Ready team. Regional VP for the west, John Hopkins and regional VP for the East, and U.K., Gary North are working closely with me to keep our short and long term strategies on track. We continue our focus on increasing shareholder value while remaining well positioned for the economic recovery when it occurs.

Both John and Gary have extensive experience in our field operations. John with six years and Gary with four. All are in key management position. Labor Ready continues to benefit from their leadership. I have furthered my involvement in day-to-day operations. Both of these leaders report directly to me, as does Canada. In addition to maintaining the strict cost controls and aggressive sales efforts we implemented last year, we continued our focus on worker safety, improving gross margins and branch profitability, while opening 42 new offices this year.

We have completed our expansion plans for the year. This quarter, we opened 12 branch offices in the U.K. for a total of 15 new U.K. branches year to date. We also opened 12 branches in smaller markets in the U.S. and Canada this quarter, for a total of 25 new express branches year to date. We are pleased with the progress of the newer branches, and we are confident that this investment will allow us to leverage even greater results when the economy improves.

I would also like to applaud the operations team on a substantial improvement they made in gross margins this quarter. Our goal was 30% or higher, and the Labor Ready team delivered higher. Gross margins for the second quarter were 30.1%, compared to the 29.5% for the first quarter and 28.7% a year ago. The team also held SG & A steady at 25% of revenue even while incurring additional expenses related to the 42 new branches we opened this year.

The rollout of the improved branch manager compensation plan will be completed by the end of the month. Branch managers are now compensated on top and bottom line financial results. For each branch. We believe the new compensation program contributed to the significant increase in net income this quarter over last year when the bonus plan did not take into account the bottom line performance. We are looking forward to tracking the new programs impact on sales and earnings growth in the future. We also recently announced our selection of triple A rated IAG to provide Labor Ready's worker's compensation insurance. The terms and conditions of the new agreement are substantially equivalent to the program under our previous worker's compensation carrier. We are very pleased with the decision to enter into a relationship with AIG, the benchmark of financial stability within the insurance industry. Labor Ready's own financial strength has allowed us to remain strong in regard to our work comp program, and it was important to us in this changing and uncertain times in the insurance industry to choose the largest insurance company in the world with the highest rating in the industry. At this time, I'd like to hand the call over to Chief Financial Officer, Steve Cooper.

Thank you, Joe. Pleasure to be with you today to review more details about the quarter. And our upcoming third quarter guidance that we have given. As Joe noted, revenue in the second quarter declined slightly by 1.6% as compared to the same quarter a year earlier. I want to share with you three components that makes up that revenue decline.

First, a 2.2% decline in the same branch revenue. That being those branches opened one year or longer. In regard to that, I want to point out in the fourth quarter conference call, when we provided guidance for the second quarter, we noted that in the second quarter of 2002, we serviced one large product for a customer outside of the normal branch activity, which contributed approximately $5 million of revenue, or1.7% of that quarter's revenue. With this taken into account for 2003, same branch revenue was substantially flat year over year outside of this one project.

The second component is our closed stores. We had a 40% basis point decline in revenue related to closing 16 branches since the second quarter of 2002. And third, we have opened new branches this year, which has applied a 1% growth in revenue from those branches opened this year.

Regionally we had varying results. The southeast area continues to post double-digit growth, and appears to have a bright outlook. We continue to see a difficult economic environment in west, and feel it may be a couple more quarters before we see improving trends in that area. The other regions of the United States are very spotty. And they seem to show positive signs of recovery at times and then fall back into the flat to slightly negative trends. Canada started the year with strong year over year growth, but as the second quarter started, the manpower services was dampened due to the increased border security related to the war and increasing concerns of SARS. The impact of those factors has started to diminish and we feel that trends there will reverse back to positive growth soon.

The growth in the United Kingdom has been spurred by the opening of 50 new branches; however, the offices opened one year or longer in the U.K. are producing results that have varied from slightly positive to slightly negative week to week, much like we are seeing in our U.S. operations. Overall, we continue to have an optimistic outlook for the growth opportunities in our industry and in all of our operating areas. Now, for some insight into our revenue guidance for the upcoming quarter, and 2003 as a whole. We have spoken in the past few quarters about the uncertainty in the economy and our ability to estimate the effects of a sluggish economy on our short-term results.

At the beginning of the second quarter, we announced we were seeing a softening in our trends and expected a decline in our revenue in April, which did occur. We started to see stabilization in May, with slight year over year growth, but again we saw softening in our June results. This pattern of slight momentum increase followed by slight retraction is what we refer into as spotty growth and this has been occurring over the past 15 weeks, after seven fairly consistent months of about 3% growth. We continue to be cautious to this point and our revenue guidance reflects that caution.

We estimate revenue in the range of $245 to $255 million in the third quarter or substantially flat year over year. For 2003 as a whole, it is difficult to make assumptions about economic circumstances beyond our current quarter. However, with what visibility we have today, we are estimating revenue in the range of $860 to $870 million. Gross profit margins in the second quarter were 30.1% as compared to 29.5% in the first quarter and 28.7% in the second quarter a year earlier. The 140 basis point improvement over a year ago came gradually throughout the last four quarters.

Part of the improvement came through increasing our average bill rate nearly 2.3% this quarter compared to a year earlier. We are also pleased that we have seen our worker's compensation cost stabilize, which is also helping us continue our improvement in the gross margins.

With the components of cost of services under control, we anticipate being able to hold gross margins at 30% going forward. Gross profit dollars in the second quarter increased 3.2% as compared to a year earlier. Although the revenue decline in the second quarter is concerning to us, we are excited to see our gross profit dollars increase as this is our true measure of growing our business. We continue to walk away from unprofitable business.

Selling general administration costs were 25% of revenue for the quarter, an increase of 20 basis points as compared to a year earlier. The increase is primarily attributed to the additional branches as we are operating 790 branches as compared to 753 a year earlier, offset by some continued improvement in other areas of our operations. At the end of the second quarter, we had 2,700 permanent employees which is approximately the same number employed a year earlier, even though we are now operating 37 additional branches. Trailing 12 months revenue per employee increased 1% to $315,000 as compared to a year ago.

Bad debt expense year to date has been 1% of revenue. As compared to 1.3% that we experienced during 2002. This positive trend has continued to increase our profitability in 2003. With strong cost measures in place, we estimate SG&A for 2003 will be approximately 25.7% of revenue or 20 basis points higher than 2002. With the new branches we opened in 2003 accounting for about 60 basis points.

Other items impacting net income this quarter were the increased interest expense of $1.2 million related to the convertible notes that we issued at the end of the second quarter in 2002. And the reduction of our income tax expense to 35% from 38.5% a year earlier. If you recall, this reduction is related to the increased tax credits that we received for putting people to work in certain empowerment zones in the United States.

We estimate net income per share for the quarter will be 18 to 20 cents and net income per share for 2003 as a whole will be 33 to 36 cents. We ended the quarter with short-term cash and investments of $110 million versus $90 million at year-end. We have continued to improve our financial position during the first two quarters by restructuring the commitments related to worker's compensation and producing strong cash flows from operations. We have appreciated this opportunity to update you on our numbers. And at this time we'll open up the call for any questions that you may have.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, press the '*' key followed by the number one on your speakerphone. If you are using your speakerphone, make sure that your mute function is turned off to a lighter signal to reach our equipment. Once again please press '* 1' if you would like to ask a question. The first question is from Jeff Silber with Gerard.

Good afternoon. Thanks for taking my call. I had a couple of questions. First of all on gross margins, you mentioned the average billing rate up 2.3%. Can you give us the same data in terms of the average wage rates?

Yeah. We can do that for you, Jeff. The wage rates were up 30 basis points.

OK Great. You also gave us a breakdown of revenue by region in terms of trends, and I was just wondering could you sort of give us a rough percentage breakdown of revenues by regions west versus the southeast as well as the U.K. and Canada.

Yeah, we haven't supplied that in the past, Jeff. I guess we don't intend to at this point in time.

Is it safe to assume that the west is your largest region?

Well, California is our --one of our older markets. It's been one of the stronger markets for quite some time. I know that we have disclosed it's been approximately 20% of revenue. That's -- that's -- that is a market that has been under pressure the last couple of quarters.

That's what I thought. I just wanted to confirm that. Also, can you give us any color by specific vertical, manufacturing, construction, et cetera, in terms of how business trends are going?

Yes. You know, we throw some caution at this when we talk about our verticals because our verticals are so died to the geographies. And it's hard -- our business mix is not the same in every geography in other words. So, sometimes if the rust belt, if the midwest is suffer, that means manufacturing is suffering. If California is suffering, that means construction is suffering. We're cautious to share verticals for that reason. We have talked about it slightly in the past. I can tell you that, you know, where we stand right now this year construction is fairly flat for us year over year.

Manufacturing, which was under some pressure for about eight quarters straight showed some growth towards the end of '02 and it's gone fairly flat. So, really what we have is a balancing between retail trade being down and some of the wholesale and transportation being up. And it's really hard for to us read a lot from that, Jeff. That's why we don't spend a lot of time talking about it, but, you know be, all in all, it's all balanced out to provide the results that we have shared with you today.

Great. I appreciate the candor. That's helpful. One more question and I'll let somebody else jump on. Can you give us roughly what cash flow from operations were in the quarter?

Yeah. I don't have that for the quarter. For the 26-week period, it's fairly flat. With the investments that we have made and the growth of our receivables being offset by the growth in our reserve for worker's comp and other liabilities being equal, and the -- what you will see in the 10Q when it's filed is net cash provided by operating activities being almost zero.

Almost zero for the six month period?

Right. Then you can take the first quarter Q and compute it from there what the second quarter was.

Great. That's helpful.

The next question is from Peter St. Dennis from Advent Capital.

I just want to know how much you guys are going to save with AIG providing your worker's compensation as far as that you had to put money aside for reserves, and, you know, what would be the use of that money. Just sort of the general plan there.

As we have disclosed, I'm sorry, I didn't catch your first name.

Peter.

Hey, Peter. This is Joe.

How are you doing, Joe?

Like we disclosed in our press release, the terms themselves are substantially the same as our previous carrier, Kempler. So, there is no significant savings, for example, in premium, and no significant changes in the collateral requirements, but we are now with a much stronger AIG system and one of the strongest insurance companies out there.

Sure. Okay. So, you are still going to have to provide that collateral?

Yes. Substantially on the same terms.

You did not say this in the press release you released today.

No. It was a press release we issued when we finalized the AIG relationship. I believe it was on July 3, Peter.

Okay. Okay. Thank you very much.

You bet.

Once again, please press star one if you would like to ask a question. Next we'll go to Dan Dittler with Lehman Brothers.

Good afternoon, gentlemen. Just a quick question regarding the succession planning for the departure of the COO. It seems as though the responsibilities will be split now between your two regional V.P.'s from the east and the west, is that correct?

That's right, Dan. We are not replacing that position. Instead, we have eliminated that layer of management, and both Gary and John in Canada will directly report to me.

Great. Thank you.

You bet.

There are no further questions. Mr. Sambataro, I'll turn the conference over to you for any closing comments.

Thank you. Well, thank you for attending our call today. Appreciate your time. Should you have any additional questions, always feel free to call Steve or I. Have a good day.

That concludes today's conference call. Thank you all for your participation today.