TrueBlue Inc (TBI) 2003 Q4 法說會逐字稿

Good morning, my name is Barbara and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Labor Ready 2003 fourth quarter earnings conference call. [Operator Instructions]

Thank you Ms. Burke, you may begin your conference.

Here with you today from Labor Ready is Joseph Sambataro, President and Chief Executive Officer and Steve Cooper, Chief Financial Officer. They will be discussing Labor Ready's 2003 fourth quarter results, which were announced after market close yesterday.

Before I hand you over to Joe, I ask for your attention as I read the following Safe Harbor. Please note in this morning's conference call, management will reiterate forward-looking statements contained in yesterday's press release, and may make additional forward-looking statements related to the company's financial 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 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-Q filed October 24, 2003.

I will now turn the call to Joe Sambataro.

Thank you, Stacey. Good morning, everyone. Today we announced that revenue for the fourth quarter ending January 2, 2004, increased 11.7%, to 249 million, and that net income increased 59%, to $5.2 million or 12 cents per share, 30% higher than our earlier earnings estimates.

Revenue for the year increased 3.3% to 891 million, while net income improved 51% to 17.6 million, or 41 cents per share. The financial results for the year were strong as a result of a combination of controlling costs and bill rate increases, which benefited gross margins, and also as a result of the sales activity we saw in the fourth quarter.

On our last call, we mentioned we were seeing an increase in demand. We were cautious in our hope that the demand for our services would build momentum and are pleased with the solid finish in the quarter in the year overall.

The strong revenue trends have continued into January. Again, across all industries and most operating areas, most notably light industrial and manufacturing. Our customers are turning to -- or returning to -- temporary labor to meet their needs for a flexible workforce as work orders increase.

These same companies will also use temporary workers to grow their business as the economy continues to improve. We believe that the demand for tempary workers may continue to outpace permanent employment growths, since temporary staffing provides businesses with the greatest flexibility.

We like what we are seeing andnd intend to capitalize on the emerging sales growth environment.

We have said before that this is a contact sport; specifically, one-on-one contact with our customers. And now, as demand increases, it's continual contact as more and more customers use our temporary workers for their manual labor jobs.

We will continue our focus on leveraging more revenue and profitability out of our existing branches. The results we delivered last year are a tribute to our management team and the people we have in field and support positions. Their commitment to profitability and customer service, their adherence to our business model and at the same time entrepreneurual spirit to grow the business, and their ability to deliver on our mission to put people to work, defines our success.

At the same time, we continue to look for opportunities to further improve results and create even greater shareholder value by expanding a smaller market in the U.S.

and Canada, as well as the UK. While closely watching costs, we plan to open 30 new branch locations in 2004, 20 in smaller markets and 10 in the UK. This growth will provide us with the additional revenue and marketshare to grow the business and deliver even greater results in 2004.

Again, we are pleased with our performance for the quarter and the year. We are poised to realize the benefits of our efforts to improve operating efficiencies and reduce controlable cost. We can now leverage our strong operational foundation to further increase revenues and profitability and strengthen our market share as the economy rebounds

as customers use temporary staffing to grow their businesses, and as we put more people to work. At this time, I would like to hand the call over to Chief Financial Officer Steve Cooper.

Thank you, Joe. Good morning, everyone. Thanks for taking the time to be with us today as we provide some details on our fourth quarter performance, and some insight into the upcoming quarter and year.

As previously noted, revenue in the fourth quarter increased 11.7% as compared to the same quarter a year earlier. It's important that I point out some specific items that will help you better understand the underlying trends that are driving our overall revenue growth.

The increase in revenue during the quarter came from the following: one, 7.5% improvement in same-branch revenue, that being those branches opened one year or longer; two, 2.1% improvement from 41 new branches open during the last year; three, an 80-basis boint decline in revenue related to closing of 10 branches during 2003; and four, 2.9% positive impact to revenue, related to three additional billing days and currency fluctuations during the quarter as compared to a year ago.

Today, we provided guidance that revenue is expected to be 200 to 204 million in the first quarter 2004. That would be 17 to 18% growth over the first quarter of 2003. I'll now provide the breakdown of that expected growth much like I did for the fourth quarter.

The first quarter growth is expected to come from the following. One, 8% growth from same-branch revenue; two, 3% growth from the new branches, mainly those branches opened in Q2 and Q3 of 2003; three, a 1% decline related to the branches closed during 2003; and four, 7 to 8% positive impact to revenue, related to additional billing days and the impact of currency fluctuations expected during the quarter as compared to a year ago.

We also provided revenue guidance for 2004 as a whole to be 940 to 960 million, or 5.5 to 7.5% growth. This growth for 2004 is expected to come mainly from 6.5% same-branch revenue ranging from 8% in Q1, and tapering down to 5% by the time we get to the fourth quarter, where we already experienced some pick up this past year in the run rates.

The only other item we need to point out is the loss of one week of revenue in Q4 as we move back to a 52-week year versus a 53-week year in 2003. This change will result in a loss of 9% of revenue in Q4.

2003 was an unusual year. Through the first 39 weeks of 2003, our revenue growth was very spotty from week-to-week. As we finished the first quarter, we had experienced six consective months of growth. From March to December, our results varied from slightly negative to slightly positive. That followed by slight momentum increase followed by slight retraction made it very difficult to predict what was going to happen next.

As Joe mentioned, though, we are encouraged by the last four months of improvement in our year-over-year revenue growth and demand for our services. The accelerated growth in late 2003 and into early 2004 is providing the opportunity to the leverage of our office network that we built out in the late 1990s, right before the recession began.

We worked hard to reduce costs through the downturn and hold the line on those costs, as demand was spotty in anticipation of a recovery. We now feel we're in great position to benefit from an economic recovery and leverage the office structure that has been maturing.

With revenue growth being somewhat spotty during the first 39 weeks of 2003, our net income growth really was driven by our ability to produce 30% margins in Q2 and Q3, which was a 1% improvement over prior year.

Our gross margins in Q4 were 29.7%, which was in line with expectations and ahead of prior year by 40 basis points. We historically have had lower margins in Q4 due to a change in business mix related to seasonality. We also have slightly lower margins heading into Q1, also related to the seasonal business mix, in addition to Q1 being the time of the year when employment costs related to wages, worker's compensation, and payroll factors increase.

Historically, we have taken these employment cost increases in January and get them priced into our bill rates during the first part of Q1 and start to see an improvement in our margins throughout the first quarter, leading us to strong 30% margins in Q2 and Q3.

We expect the same thing to happen in 2004. Our margins for Q1 are expected to be similar to the 25.5% we produced in Q1 of 2003. We also expect 2004 as a whole to be similar to all of 2003 at close to 30%. Selling, general, and administration costs for 2003, as a percentage of revenue, were consistent with 2002 at 25.4% in the fourth quarter, with an increase in our revenue as discussed.

SG&A was 80 basis points lower than a year ago, at 25% of revenue. We are excited to see the operating leverage we have discussed previously work so well as our revenue has begun to grow.

We planned to hold the line on expenses in 2004. Increases in expenses in 2004 we are expecting are as follows: approximately 3.5 million to operate additional 30 new offices we're opening, and approximately 3.5 million to service the same branch revenue growth. This is mainly related to variable compensation and variable transaction costs.

There will be other slight increases related to general inflation and new branch manager compensation plans, that we intend to offset with further efficiencies and cost reductions in our business.

By controlling costs while revenues are showing improvement, we are expecting to show the leverage we have in our business by reducing SG&A as a percentage of revenue a full 1% to 24.5% for 2004 as a whole, compared to 2003.

By leveraging our costs with increased volumes, along with producing consistent gross margins, we expect to improve operating margins close to 1% in 2004 to approximately 4.4%, up from 3.6% in 2003 and 2.4% in 2002. This improving trend in operating margins over the prior years again demonstrates the available leverage in our business model.

We expect depreciation and interest expense to remain constant in 2004 compared to 2003. There was a 1.5 million increase in interest expense in 2003 over 2002, related to the convertible notes that were issued during mid-2002.

Our income tax rates for the year was 36.4%. The 39.3% rate in the fourth quarter was to adjust the annual rate to the expected rate, as income grew during the fourth quarter to higher levels than we anticipated.

Our incremental tax rate of 40% is higher than our effective rate due to the benefit of $1 million of tax credits we have been getting related to increased tax credits for putting people to work. The $1 million credit has leveled off and is not growing in relation to income. We're expecting our effective tax rate to be 40% less to $1 million in credits, or 37.5% for 2004.

We should point out that the worker opportunity tax credit program for putting people to work is subject to renewal and expired on 12/31/03. Although we expect it to be retroactively renewed, as it occured in prior years, the program has not yet been officially renewed for 2004.

Our estimated loss per share for the first quarter is expected to be 1 to 3 cents on a basic share count of 41 million shares. And estimated net income per share for 2004, as a whole, is expected to be 49 to 52 cents on a fully-diluted share count of 52 million shares.

We ended the year with short-term cash and investments of $108 million versus $90 million a year ago. In addition to these cash balances, we have continued to improve our financial position by restricting cash, and ended the year with 110 million in restricted cash related it our Indian workers compensation reserve of 101 million.

We continue to produce strong cash flows from operations and have 1.4 million authorized shares in our repurchase program after buying over 800,000 shares during the year. It's been our privelage to update you on our results and provide you some outlook for 2004. At this time, we will open up the call for any questions you may hve.

At this time, I would like to remind everyone in order to ask a question, press star and then the number 1 on your telephone key pads. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Craig Peckham Of Jefferies.

Good morning, Joe and Steve.

Hi, Craig.

With respect to the guidance, I did notice that you have adjusted higher your revenue expectations relative to the December update you gave by about $20 million, and also, you changed slightly the new branched target from what I think was 35 down to 30. Those two changes, I wondered, if you could comment on.

But as it pertains -- pertains to the change in the revenue guidance specifically, why aren't we seeing maybe an increase in the high end of the range on the earnings-per-share line?

I will address the branch question and Steve will address the revenue in the bottom line. Last year we opened 40 branches; this year, we have been talking in the range of 30 to 35. Right now, we have got leases and plans in place for 30, that may go to 35. That's kind of a polishing-off, so to speak. So at this point in time, we're real comfortable with the 30 locations and during the year, we'll probably see other opportunities.

But it's a constant refinement of our office counsel, so to speak, our portfolio, just like you refine. So, there is always going to be a few closings and a few openings during the year.

Good morning, Craig. Yes, we did move our midpoint of our revenue up $20 million. We actually moved the low end and the high end up 20 million. And with that, one would have expected that our net income per share range might have moved up 2 cents. And what we did is move the low end up one, gave us more confidence in the high end of the range than we previously put out when we came out in December.

There's are a couple of reasons why we didn't get too aggressive in moving the net income range up early in the year. One was, as we talked about the tax rate, that with the higher net income and understanding how that -- where these tax credits are going, our effective tax rate is actually going up a percent as compared to a year ago. And with the guidance a year ago, we were at 35.5 approximately; this year, 36.5 and guiding up to 37.5. That impacted the net income slightly.

And then also, I discussed a little bit of our concerns about gross margins. Although we have historically been able to pass these increases through, there were some significant increases again this year, and our margins in January were impacted much like they were in the first month of '03.

We have confidence we'll get that passed through, but at this point, we're being somewhat cautious with that, and didn't feel comfortable raising the high end, but wanted to give a signal we were more comfortable with the high end of the initial range we put out.

Okay. And if I may, I wanted to ask a follow up. Not specifically pertaining to the quarter, but rather, we have seen some initiatives out of the white house on adjustments to immigration policy specifically relevant to workers. I wondered, Joe and Steve, whether or not you could give us your thoughts on how that may impact your base of business in the blue-collar labor world?

It's really hard to say, Craig. I don't see anything negative from it. I see some potential positives.

One would be certainly our worker base would increase. Two, it would cause businesses that do use illegals to be more aware of the laws, and the fact that they're breaking the laws when they're putting these people to work that aren't really allowed to work in the U.S..

So, I see one an increase in our workers and, two, potentially some of the businesses which typically aren't our customers, because when you put somebody to work that is illegal, you're taking a significant risk in that you're not paying taxes, obviously, but should that person be injured, maybe it will increase the awareness of that in this country.

But per say, you know, we don't have a position other than just those thoughts from me on it.

Okay. Thanks, Joe.

You bet, Craig.

Your next question comes from Jeffrey Silber of Harris Nesbitt.

Good morning. A couple of questions related to gross margins. I'm just wondering what you guys are incorporating into your assumptions for your workman's comp expansion, excuse me, as a percentage of revenues for 2004? Also,relative to passing through increases in [PSEUDA], is it easier for you to pass increases through workman's comp?

Well, I'll take the second one last. I don't think it's all that easy passing through any increases. Although we were successful in passing through 2% average bill rate increases during '03, it's never easy to get out there and increase your customer's prices, as they're all out there trying to increase their own costs.

Also, on the pecking order, we have three items that are in our cost-of-services. First, the wages we pay to our workers. That is probably the easiest item to get passed through because, somewhat, our pay rate is tied to minimum wage of some sort, and so when that goes up, the minimum wage goes up in a state, most employers are filling these similar types of positions that same pressure to increase, or the line of changes that they have to increase. That was a little easier to pass through.

The worker's comp and the [PSEUDA] doesn't hit everybody exactly the same. A portion of the [PSEUDA] hits everybody the same, but everybody's own experience is a little bit different. But which one's easiest, I don't know, Jeff. They are all difficult.

We showed a good track record in '03, and we're off to a good start in '04. It's obviously at the top of our mind and the top of all of our internal communications as we discussed this with our sales teams.

Okay, and going back to the first part, worker's comp as a percent percentage of revenues, roughly what are you budgeting for this year?

We are looking at about 8% of staffing revenue.

And how did that compare to '03?

'03 was about 7.5, so it's an approximate 7% increase.

Okay. You had mentioned the bill rate increase for '03. I'm just wondering if you think it's the bill rate and the wage rate increase just for the quarter that just ended the fourth quarter '03.

Okay. For the quarter that just ended, the bill rate ended the year at $12.26, which was a 1.4% change over prior year, same quarter a year ago. Pay rate ended the quarter at $7.02 versus $6.96, or .9% growth over the same quarter a year ago.

Okay, great. Just one follow up on the office expansion strategy. Of the 20 or so offices that you're looking at putting into the U.S., can you tell us a little bit about the type of offices and maybe the types of locations you're looking at? Are they in existing locations or new locations for you?

It's probably a combination, Jeff. They're tertiary markets, they're called; typically populations of 250,000 say, or less. We screen out for the type of businesses to make sure their users of our types of services, but the other condition we have is that they can be no closer than 25 miles to an existing Labor Ready branch. The purpose of that is they don't grow at the expense of another branch.

These are smaller -- it sounds a little bit like this is a new adventure for us, but actually, just slightly under a hundred branches of ours have already been in towns like this and have done well, because typically, we're the only service in that town.

Okay. Great. Thanks a lot.

Your next question comes from Dan Dittler of Lehman Brothers.

Good morning, gentlemen.

Good morning, Dan.

Just a follow up on direct cause. Is it fair to say that you're expecting a similar rate of inflation in the first quarter of '04 as you did in the first quarter of '03?

Yes, that would be appropriate. That is something that is really hard for us to measure when our costs are moving around.

We're controlling costs, we're changing efficiency to systems, but we do try to break that down or at least build into our estimates that there will be some sort of inflation. However, we have been fairly good at continued increased efficiencies, and control other costs offset that.

This past year, there was a little bit of an inflation that creeped in, but we've got some good goals for '04 that we intend to offset any inflation that hits us with increased efficiencies.

That's why we gave guidance of SG&A being about $7 or $8 million above prior year on these revenue estimates that we have given today.

And with regard to how you are approaching clients and your discussions to pass through these direct costs increases, how has your approach changed, if at all, in 2004 versus, say 2003, or even going back to 2002?

To approach a client is on a client-by-client basis, but as you know --as many people know -- we don't have long-term contracts with our customers. Our service is on demand. The average customer uses $3,000 worth per year. So, we're not waiting for a contract to expire, so to speak, before discussing price increases.

At the same time, we do have relationships with our customers. So as new customers come in, they get the new bill rate and our staff in the field work in the increases based on that relationship. That's why we're looking to successfully pass these cost increases through in the first quarter.

You start looking back, Dan, in the beginning of 2003, 2002, it certainty was significant pricing pressure. And as Steve had mentioned, you never take that for granted, that there are people on the other end trying to control costs just like we are. But if the economy continues to stay strong, which we expect it will, given all the indications we see, it makes it a little easier to pass those costs through.

Great, and if I could shift gears for a minute and move to your branch openings in the UK in 2003. How did they finish up the year versus your plan?

They're on track. They're on track. They took a little longer over there. Some of the cost structure is a little higher, especially in the leasing arrangements in the UK for space. But they're on plan, as we would expect, and the existing branches that were open before that have been ramping up very nicely.

Great. Thank you very much.

You bet. Thanks, Dan.

Your next question comes from [inaudible] of Criterion.

Hi, guys. Could you give us a sense of where you stand on sort of revenue-per-branch, and where you expect that to go given the guidance for '04?

Yeah. We ended the year at approximately $1,150,000 per branch, which was really close to where we were a year earlier, mainly due to the fact that we had opened these 40 branches throughout 2003, and really through 39 weeks hadn't experienced a lot of revenue growth like we had when we had made the announcement.

We made the announcement early. About a year ago right now, we were seeing nice revenue growth in the first quarter. But as I have mentioned in my previous comments, we went through a six-month stretch there where things were quite spotty, and during that period of time we didn't get the growth and average branch revenue that we had expected.

However, we ended the year nicely, as we talked about the uptick in revenue in the fourth quarter. So with that said, moving into 2004 with the projections we have on the table, we'll get real close to $1.1 million per branch by the end of '04. And then moving forward from there, we were expecting $1.2 million for 2004. So moving forward from there, we're seeing nice maturity in our branches.

We don't expect that we will dilute our share -- our branch count much more than we have the last couple years, opening less than 5% of our base, and with that we'll continue to grow the average branch volume forward.

That's really where we get this revenue, or this leverage, in our revenue growth from to move the operating margins forward like we discussed.

So, does the $1.2 million include the 30 now branches?

Yes, it does.

Great. And then in terms of the increases in your various costs that you need to pass through, when exactly do you try to pass that through?

You said mostly costs are incurred in January and then you try to pass it through after that. How does that work?

Quantify it before, you know. We get the numbers before January 1 and we put them into our system, Evan. The way our system works is we update it here in corporate, and when a price quote goes out, it's all current numbers, whether it be by state for the minimum wage, or by state for worker's comp, or state unemployment tax.

So on January 1, we began putting those costs through and we expect that by the end of the first quarter we'll have those.

Okay. Great. Thank you.

You bet. Thanks.

At this time, there are no further questions.

One more comment by Steve Cooper.

It was pointed out to me that in my comments, I may have given guidance for Q1 gross margins. I may have given the numbers backwards, but our official guidance for Q1 gross margins is 29.5%, which is consistent with the margins we had in Q1 of '03.

Clarification. If there's no further questions, thank you very much for attending our conference call. We look forward to talking to you next quarter, but should there be any questions in-between or after this call, feel free to call Steve Cooper or myself. Thank you very much, have a great day.

This concludes today's Labor Ready 2003 fourth quarter earnings conference. You may now disconnect.