TrueBlue Inc (TBI) 2003 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the Labor Ready third quarter earnings announcement conference call. Today’s call is being recorded.

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 Ms. Tracy Woods at 1-800-610-8920 at extension 8206 and a copy will be faxed to you.

Now for opening remarks, I'd like to turn the call over to Ms. Stacy Burke.

Here with me today from Labor Ready is Joe Sambataro, President and Chief Executive Officer and Steve Cooper, Chief Financial Officer.

They will be discussing Labor Ready's 2003 third quarter earnings results which were announced after the 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 results and operations in the future.

Although we believe the expectations reflected in these 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 August 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 third quarter, ending September 26, grew 1.4% to $254.5 million. And that net income increased 22% to $10.3 million or 22 cents per share.

We achieved bottom line growth during the quarter and are encouraged by our results. Most notably, we saw an increase in total sales in year over year improvement in same store sales.

We held gross margins at 30%, consistently for the quarter. And we continued to control SG & A while opening 42 new branch locations this year.

Certainly, the flexibility of our business model in addition to strict cost controls and aggressive sales efforts has brought us to where we are today. Which is poised to leverage even greater results as the economy improves. We are encouraged by the momentum we saw at the end of September, and the first weeks of October.

For the fourth quarter, we estimate net income to increase 20% over a year earlier on revenue of between $228 and $233 million. We anticipate net income for the year to increase 40%, with revenue between $870 and $875 million.

Our goals are to continue to focus on branch profitability, specifically increasing same store sales. Expand our market share in smaller markets in the U.S. and Canada as well as expand operations in the U.K. Again, we are encouraged by our results, including same store sales growth in the third quarter and positive momentum going into the fourth quarter.

Branch profitability is a key metric and we certainly believe we have the infrastructure in place to leverage more sales over the same calendars. When I say infrastructure, I mean a combination of people, locations, technology, policies, and business strategies. We believe our average branch is at 50% of capacity, and the infrastructure we have in place will allow us to continue to grow same store sales, and achieve that four to one return that we spoke of before -- that for each 5% in same store sales, we achieve a 20% increase in net earnings.

While I will reiterate that our goals are sales, smaller market expansion and growth in the U.K., the operations team would say that our three goals are sales, sales, and sales. At the same time, we see opportunities to expand our footprint in smaller markets in the U.S. and Canada. We are seeing continued progress in the 25 new smaller market branches we opened in the U.S. and Canada this year.

The smaller market branch model operates with fewer staff and without the initial costs of a cash dispensing machine. The service does not change for our customers. The smaller market branches allow us to test the market and may provide us with some additional opportunities.

We are also encouraged by the progress of our 46 locations in the U.K.. Our branches are ramping up and one year and older branches as a group are profitable. Last month I again toured our branches in the U.K. and took the opportunity to meet with the managing director of the staffing industry association in the U.K.. We spoke at length about the benefit of our service to both workers and business customers. Including work today, pay today. Our hours of operation, and Labor Ready's ability to provide dependable temporary labor on demand.

He was impressed by the enthusiasm of our people, and the uniqueness of our business model. We look for our U.K. operations to provide future growth in revenue and earnings as we continue to carefully build out the U.K. to our estimate of 100 total branches.

So, our focus remains on branch profitability, expansion in smaller markets in the U.S. and Canada, and growth of operations in the U.K. We believe these goals combined with the energy of the operations and support teams will continue to have a positive impact on our business going forward.

We certainly intend to leverage these strategies and improvements in the economy to deliver strong results going forward.

At this time, I would like to hand the call over to Chief Financial Officer Steve Cooper.

Thank you, Joe. Thanks for taking the time to be with us today as we give you some details on our third quarter performance and provide insight to the upcoming quarter.

As previously noted, revenue in the third quarter increased 1.4% as compared to the same quarter a year earlier. The change in revenue was made up of the following three components.

First, a 60 basis point improvement in same branch revenue, that being those branches opened one year or longer. Second, 150 basis point improvement in revenue from the new branches opened this year. And third, a 70 basis point decline in revenue related to closing certain operations since the end of the third quarter of 2002.

Regionally, we continue to have varying results. Although we continue to see a difficult economic environment in Northern California, Oregon and Washington, we have seen some stabilization in those areas, and we are pleased with the most recent trends as the year over year comparisons are starting to improve.

The Southwest area, including Southern California, Las Vegas, and Phoenix, has shown strong results this quarter. Most other regions in the United States continue to be very spotty and seem to show positive signs of recovery at times, and then fall back into the flat to slightly negative trends. Overall, we continue to have an optimistic outlook for the growth opportunities in all of our operating areas.

2003 has been an unusual year for our company as well as most other staffing companies, and the economy as a whole. As we finish the first quarter, we ((had)) experienced six consecutive months of growth. Since March, our top line growth has varied from slightly negative to slightly positive. That is six months of very spotty results.

We are, however, encouraged by the results of the last eight weeks. All of which have shown positive growth and it appears those trends may continue throughout the fourth quarter.

We have estimated revenue growth of 3% to 4% year over year for the fourth quarter. We are excited about the momentum we may see finishing 2003 - which should bode well for 2004. However, at this time, we are not going to provide guidance for 2004, as we want to see how things develop during the fourth quarter as an indication of 2004.

However, I will mention that since we changed our fiscal year to a 52-53 week year ending on the closest Friday to the end of the year, our current quarter will end on January 2, and the first 13-week quarter of 2004 will end on April 2. By comparison, our first quarter of 2003 only had 12 weeks and two days of revenue, since it ended on March 28. We estimate that the impact on revenue for losing five additional days of revenue to be approximately $8 million.

We also need to point out that our year-end change also has an impact on our comparability of our fourth quarter results of 2004. Q4 will be a 13-week quarter versus the 14-week quarter we had in 2003, resulting in the reduction of revenue in Q4 of 2004 by approximately $8 million as compared to Q4 of 2003.

Although the shift in quarter end dates will impact the revenue for Q1 and Q4, in 2004, the year as a whole will not be materially impacted.

Gross profit margins in the third quarter were 30.1% which matched our second quarter gross margins and were 1% higher than the third quarter margins a year earlier.

This improvement was as a result of our focus on the profitability of each piece of business which produced an average bill rate of nearly 1.6% higher than a year earlier. We have also continued to see our worker's compensation costs stabilize at 7.5% of revenue for the third quarter and year to date, compared to 8% a year earlier.

With the components of cost of services under control, we anticipate being able to hold gross margins at approximately 30% going forward.

Keep in mind that our gross margins in the winter months are slightly below those we experience in the summer months, when our construction work is at its peak. Therefore, there could be a 30 to 40 basis point difference in gross margins between Q3 and Q4.

Gross profit dollars in the third quarter increased 4.8% as compared to a year earlier. We are pleased to see our gross profit dollars continue to show positive year over year growth as this is the true baseline of growing our profitability.

Selling general, administration costs were $22.5% of revenue for the quarter. An increase of 10 basis points as compared to a year earlier. The increase is primarily attributed to the additional branches as we are operating 788 branches as compared to 749 a year earlier. Offset by some continued improvements in other areas of operation.

At the end of the second quarter we had 2,750 permanent employees, which is about 50 less than we had a year earlier, although we are now operating 39 additional branches.

Trading 12 months revenue per employee increased 3% to $314,000. Bad debt expense year to date for 2003 was 1% of revenue as compared to 1.3% that we experienced during 2002.

Other variable costs have remained in line with expectations, and prior year amounts. Depreciation, interest costs and other expense items have all remained consistent year over year.

We continue to expect our tax rate to be 35% for 2003.

The only significant change in our balance sheet since year end in December is a shift in the working capital items of receivables and payables related to our seasonal growth in business.

We have appreciated this opportunity to update you on our results for the quarter, and provide you our outlook for the fourth quarter of 2003. At this time we will open up the call for any questions you may have

Thank you. (operator instructions)

We'll take our first question from Adam Waldo with Lehman Brothers. Please go ahead.

Good afternoon, Joe and Steve. Congrats on a spot-on quarter with your positive pre-announcement in September. A couple of questions, if we could, on the quarter and then as we look ahead. Could you give us a sense for what comp store sales trends were by month over the course of the quarter and in particular what you saw in September and the early part of October that's cause for the optimism, Joe, that you alluded to qualitatively in your prepared remarks?

Sure. Steve is going to get those numbers for you.

I don't have the comp store sales by months in front of me. I do have the total sales growth rate in front of me, and I can get back to you with the comps by month.

In the aggregate, what would it have been, Steve, that for the quarter as a whole?

It was 60 basis points. Just less than 1%.

And that is the one year and older stores, right?

Yes.

All right.

By month, total sales growth was 2.2% in July. 0.5% in August, and then 1.8% in September. With most of September showing strength the last couple of weeks in September and then moving into October, we have shown a strong 4-plus percent week --year over year for the first couple of weeks.

In aggregate revenue growth as opposed to comp store sales?

That's right.

Okay. In the first couple of weeks of October.

Yes.

Okay. And then, if we turn to 2004, I know that you all want to complete your planning process before giving any '04 guidance, but as you are approaching the '04 planning process, can you give us some sense for how you are all thinking about total office openings and some sense for how you are thinking about North American versus U.K. openings, and in particular, how you're thinking about the Labor Ready express model in North America, if can just talk about that a little bit?

I can address that. Like you said, Adam, we're still in the planning process for new offices. As far as openings, we're looking at the express offices, and today the express offices as a group have been performing to our expectations, and our model for the express offices have them break-even by the end of the year. As we mentioned in our analyst presentation in New York, we expect that to happen by the end of this year.

So, we have asked our operators in the -- in North America to look at those opportunities and come back to us in the budgeting process for where they can see branches, express offices that can accomplish that same goal of breaking even by the end of the year. We're in the middle of that right now, so it would be premature to estimate that.

Joe, in the aggregate, though should we be thinking about sort of 2%-3% net office expansion next year in light of recent revenue trends? Is that a reasonable, conservative expectation for investors to have?

I think that's a reasonable conservative estimate.

And then finally, any commentary on bill rate and pay rate inflation trends in the third quarter?

Sure. The bill rate was 1.6%. The average bill rate was 1.6% year over year change, positive. And the pay rate was 10 basis points. Up. So there was a 1.5% spread there.

Great. Thank you all.

You bet. Thanks, Adam.

At this time, we have one question remaining in the queue. (operator instruction)

We'll take our next question from Jeff Silber with Gerard Klauer Mattison

Thanks. Good afternoon. I just wanted to clarify some of your guidance. I know there is an issue on the share count with the convert kicking in, but I was wondering what share count guidance you would give us for both the fourth quarter and the year 2003. So we can come up with an EPS estimate.

For the outstanding basic shares, I would use $40.5 million for the yearend number and a diluted $51 million -- $40.5 million for basic and $51 million for diluted.

And again that is for the year end number?

Yes

Great, just wanted to double-check that. Not to ((knit-pick)) a little bit, but it looked like you closed a couple of offices during the quarter. One, I just want to confirm that, and number two, were those offices in your Labor Ready Express Model or were those some older offices?

Yes, they were here in the United States, and we used to --when we would move an office from one area to another, maybe within district manager's district, we wouldn't classify that as a close and an open. And this quarter, we classified a couple of those moves as openings and closes. So, we announced that we had three closings and one opening. So, there were two net closings, and they were in larger markets here in the United States. They were not the Express Model.

Great. And then actually, a client asked me this question, so I'll just forward it over to you. Again, this is minor, but with the strikes in the grocery stores going on in southern California right now, are you seeing any positive impact on your business down there?

No. We don't support strikes. If there is a customer, there has been a customer for a while, for example, and took five workers, we provide them five workers, but if they're looking for people to support strikes, we don't support that.

Great. Just wanted to clarify that. Thanks a lot.

You bet.

Our next question is from John Schneller (ph) with DM Knot. Please go ahead.

Hi, Joe and Steve. How are you?

John, I was looking for you in New York.

I'm sure Jeffrey told you why I missed it. But in any event, I know it's not the end of the year, which would make this a little bit easier to discuss, but can you talk a little bit about frequency and severity of loss in the worker's comp program.

Sure. Yes we have had a fairly decent year, this year. We have put a lot of preventative controls in place and have had a lot of focus in this area of -- on the frequency and we are currently experiencing about a on average 9% decline in frequency in 2003, as compared to 2002.

As to severity in the current year, it's too early to measure on the current claims, but the older claims are very stable at this point, and we have not seen a significant change in our estimate on the older claims throughout the year. And it's really too early on the current year to tell where we are at on the severity yet, but we're pleased with the frequency trends.

So medical inflation doesn't appear to be having a major impact?

Well, we have estimated in Medical inflation our estimates, so as long as it doesn't exceed what we have estimated in, which that is the case.

Okay.

So, our actuaries have put in their estimate of Medical inflation, and that's been adequate this year.

And what are you using for a discount rate now?

We are using 5%.

Thank you very much, and ((congrats)) on a great quarter and tough market.

Thanks, John.

Our next question is from Charles Gunther with Wells Fargo Securities, LLC. Please go ahead.

Good afternoon, gentlemen. Could you give us please some color on how your branch managers' field managers' compensation scheme is working out, whether it's turning out to cost you more money than the previous system or not, whatever color you can provide?

Yes, I think it's working fine. Just general feedback we got is really positive, probably largely because before we had the program about a third of our managers participated and now two-thirds. The total cost that we estimated is about right on where we expected it to be. We are probably going to tweak it a little bit, you know, just some further refinements, but overall it's been a good connection by the branch managers to what our shareholders are looking for as well. That's a combination of both sales and earnings.

Thank you.

You bet, Charles.

(operator instructions) The next question is a follow-up from Adam Waldo, Lehman Brothers. Please go ahead.

Just one quick follow-up about '04 again, just trying to dimensionalize '04 more precisely. You all are on track to accrue workers comp expense this year at about 7.7% staffing revenue. Should that be an adequate accrual rate to think about for '04 in light of the experience you're seeing so far this year, both in terms of claims, frequency and severity and also in terms of medical cost inflation or is that just premature until Telling House (ph) does their review for this year?

Well, we have asked for an early indication for '04. It may be slightly premature, but I will go ahead and speak to what I know right now.

Okay, thanks.

And that is they have told us to use about a 7% inflation on medical costs. With the trend of frequency being down 9%, we are -- you know, we're thinking that the run rate, it should be adequate, the two should offset each other at this point. So, I -- you know, we're not going to change that guidance at that point, Adam. I think that it's sad to say that bringing the frequency down only offsets medical inflation, but that's where we are at right now.

That would be under an expectation that bill rate inflation continues in the 1% to 2% range. Is that fair?

We don't see any significant shift in being able to get the bill rate going any stronger than that. You know, a lot of that bill rate increase that we have quoted at 1.6 is business mix change. You know, we have -- we cleaned house eight or nine months ago on some low margin accounts, and that actually was a shift in the bill rate right there. The actual ability to charge more per hour really isn't what's driving our bill rate mix right now.

It's the account pruning. So, as you are thinking about '04, you are thinking about really modest bill rate inflation?

Yeah. We really cannot see much beyond that right now. You know, we obviously test those waters strongly, but it's still at the part of the cycle that cost controls are important to companies, and we don't seem to be getting a lot of inflation in the bill rate at this point in time.

So, we'll see how that develops throughout the year as we know that as demand picks up and things start moving again, we should be able to see a little bit of improvement, but with worker's comp costs stable, and no -- you know, the wage rates stable also, given the fact there's plenty of supply, we don't think that's going to eat into our margins.

Sure. Thank you. You bet.

Our next question is a follow-up from John Schneller (ph) with D.M. Knot. Please go ahead.

Thanks for taking the follow-up, Joe and Steve. The competitive environment, I would assume you can actually gain market share, although there may not be good metrics for that, but you can gain some market share during a difficult environment, say, over the past two-plus years.

I wondering what you are seeing out there in terms of competition and are people --this is to the gross margin question. Are people undercutting you on bill rate and that sort of thing to try and maintain market share? Then a follow-up to that would be what is your litigious situation. I know from time to time you have ex-employees going out starting up on their own and challenging some non-competes if you could elaborate on that a little bit.

As far as market share, John the last couple of years has been probably the toughest, obviously with the staffing industry taking a decline and our revenues went down 12%. Some of the smaller operators when they -- when they hit these kinds of situations, they lower their prices, and it did accelerate a number of them going out of business or just leaving the market, so to speak. So, how that -- how does that interpret in the gain, it is kind of hard to say.

You know it's a market-by-market analysis, really, that you have to look at. In the current environment, you know, there's always somebody in the major urban areas that's willing to do it for less. Obviously, we're not looking to find the bottom pricing. We look for the work and we charge the rates that we think that are fair. And we provide the service that distinguishes us.

So, as far as market share, if I were to guess, we would probably either maintain or increased it, but you got to remember that in our business, the day labor market is measuring market share is difficult since almost all of our competitors are privately owned and there's not a lot of data in that respect.

Right.

I think your second question was litigious. We disclosed all of our lawsuits in the 10Q and 10K. We have a policy that if anybody has a non-compete with us and it doesn't matter who it is, if they break that non-compete, we will pursue them legally. It just is a matter of not only for protecting our business and our market share and our operations, it's a matter of policy. And so, from time to time we're dealing with that, and we'll continue to deal with it. We have had a good success record in that regard.

So, there's no noticeable change?

No. Just pretty much business as usual there.

Okay.

Fewer people are running out in the middle of the last two years to open staffing companies. You know, it's a tough environment. It's not quite like it was in 1997 and 1998 to open. So, that might change as the economy improves.

Right. Great. Thank you.

All right, thanks, John.

(operator instructions)

I'd like to turn the conference over for closing remarks.

Before we close, Steve, would like to just answer Adam's question on same store sales.

Yes, I have those comps by month. July -- this is the 12-month in all of our stores for each of these months. I had given you the full growth in each of those months. Here's the comp, 1.2% for July negative 0.4 in August, and 1% in September.

All right. Well, thank you everyone, for your time today and should you have any further questions, feel free to call Steve or I, either after this call or any time during the quarter. Thank you very much.

This does conclude today's discussion. You may disconnect at this time. Thank you.