TrueBlue Inc (TBI) 2004 Q1 法說會逐字稿

Good day everyone, and welcome to this Labor Ready 2004 first quarter earnings conference call. Today's call is being recorded. Joining us today is Labor Ready's President and CEO Joe Sambataro, and CFO, Steve Cooper. They will discuss Labor Ready's first quarter's earnings results, which were announced yesterday. If you have not yet received a copy of this announcement, please contact Lisa at 1-800-610-8920 extension 8206 and a copy will be faxed to you. At this time I would like to hand over the conference to Ms. Stacey Burke for the reading of the safe harbor. Please go ahead Ms. Burke.

With you 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 2004 first quarter earnings 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 that 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 relating 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-K filed March 2, 2004. I'll now turn the call over to Joe Sambataro.

Thank you Stacey. Good morning everyone. Yesterday, we announced that revenue for the first quarter ended April 2nd, 2004 increased 21% to $209m and that net income for the quarter was $0.02 per share as compared to our loss of $0.08 a share for the same period a year earlier. We significantly exceeded our own estimates for the quarter. I am quite proud of these positive results and the team that produced them. Growth in the first quarter of 2004 continues at the strong pace we saw at the end of 2003. This increase in demand for temporary labor is continuing to be driven across most industries and regions we serve. As small and mid sized customers respond to the up tick in the economy, we see them using temporary labor as a viable option to manage their largest expense item which is labor as a variable cost.

Companies that want to accelerate their business as the economy improves will control cost, improve production and manage risk, all of which can be done with the contingent workforce from Labor Ready. We are excited about 2004 as a whole. We have made the right strategic moves to provide us with a significant earnings power we announced yesterday. I'll start by updating you on each strategy. First, our strategy to grow revenue and profitability of existing branches. We announced on a comparable billing day constant currency basis that sales from branches opened 12 months or longer grew nearly 12% in the first quarter over a year earlier. We are pleased with the continued progress of our existing branches. We believe our investment in our branch manager compensation program, our employee training, and our employee mentoring will enhance profitability in the future as we accelerate this growth strategy.

Second, expanding in the soft smaller markets in the US and Canada which allows us to serve a secondary marketplace with relatively little incremental expense. In the first quarter of 2004, we opened 24 branches in the US and planned to open four more in the US in the second quarter. If you recall, we opened 25 smaller market branches in 2003. Our goal for the group was to breakeven by December 31st. And while we did not achieve that goal, we came very close in spite of a sluggish economy in the first nine months of 2003. With the current economic environment, we believe that branches we opened in 2003 along with the 24 we opened this quarter will all breakeven this year. These smaller branches operate with a reduced cost structure, lower opening cost and lower closing cost as well. We continue to perfect our smaller business, market business model. The smaller market expansion makes good business sense and the branches will deliver and have delivered real cash flow in customers. We see a potential of 300 smaller market branches locations in the US and Canada.

Third. We continue to expand our operations in the UK. Opening three branches in the first quarter with plans to open three more in the second quarter. Last year, we opened approximately 15 offices on a base of 30, with most of these offices opening in the second quarter of 2003, increasing our operations 50%, challenged our human resources in the UK and they stepped up to that challenge. This year, our plan is to further absorb the 2003 openings for further penetrating the UK's largest market. We plan to open six branches in London, where we see a very attractive market potential for our services. We continue to see the opportunity to operate between 100 and 125 offices in the UK. It is truly rewarding to know that customers in the UK are benefiting from our service and to see our success in that market. The fourth strategy, which we haven't talked about before, is further penetration of existing markets with additional brands and diversification of services.

On April 5, we purchased Spartan Staffing for $9.5m in cash. We estimate the purchase will add approximately $40m in revenue and added $0.01 per share for this year. Spartan Staffing Inc operates two divisions, Workforce and Spartan Staffing. Workforce has 16 locations in Florida, North Carolina, and South Carolina. Spartan Staffing has nine locations in Florida and two in Texas. We intend to operate Labor Ready, Workforce, and Spartan Staffing as separate brands. Workforce is an opportunity to expand our market share in the strong Southeast market. We now have, for example, a Labor Ready branch generating $2m in revenue down the street from a Workforce branch generating the same revenue.

Operating these two branches side by side, allows us to expand our region in that market circle and build on the reputation of both companies, which places real pressure on the competition. Spartan Staffing is a well-managed profitable platform in Florida that sells longer-term light industrial staffing assignments. The customer base is similar to our small and medium size business customers. Their workers are essentially one skill set above Labor Ready's temporary employees. By strategically aligning the market and services of both companies, customers benefit from our ability to serve their needs with a slightly wider range of services, that may now include both the dispatch manual labor and the longer-term staffing employees. For example, in transportation, a Labor Ready worker will unload the trucks while Spartan will fill the order for a driver or a machine operator.

We see the opportunity for continued growth and diversification in this model, leveraging the strength of both companies to serve workers and customers. This is how we leverage that trend. We serve more than 275,000 customers that may need unskilled and semiskilled workers to meet their business demands. We also serve nearly 600,000 workers, people looking for opportunities. We are now able to provide employees with more opportunities for work and we have provided a pipeline of additional temporary employees for Spartan's customers. We see several attractive opportunities in this model and we will decide during 2004, how best to roll it out to our major market circles. We will speak more about this in the future. Labor Ready is a leader in providing temporary manual labor to the light industrial and small business markets. That is our strength and we remain focused on it. Through thoughtful operations and strategic management, we are well positioned to fight in a recovering economy.

Again, we are please with the performance for the quarter. We look forward to updating you on these strategies. In the year ahead, we will focus on leveraging our leadership position to support our customers through the most critical and exciting period of the recovering economy. At the same time, we will further position our company to capture new opportunities as the economy continues to improve and we continue to put people to work. At this time, I would like handle the call over to our Chief Financial Officer, Steve Cooper.

Thank you Joe and thank you for taking the time to be with us this morning so, we can update you on the quarter. As previously noted, revenue in the fourth quarter increased 21% as compared to the first quarter of 2003. I will share with you a breakdown of the revenue growth to help you better understand our underlying trends. The increase in revenue during the quarter came from the following four components. First, branches opened one year or longer, our same branch revenue, that has showed a 11.7% growth, including a 1.7% improvement in the average bill rate per hour. Second, new braches opened less than one year. Net of those, we closed during the past year, added 1.6% to our revenue. Third, we had four additional billing date this quarter, which added 7% to our growth rate. And four, fluctuations in foreign currencies as compared to a year ago added 1% to our growth rate. Today, we provide a guidance that revenue is expected to be between $253m and $258m in the second quarter of 2004, that would be 17% to 20% growth over the second quarter of 2003. I'll now provide a breakdown of that expected growth much like I just did for the first quarter with actual results.

The second quarter growth is expected to come from the following components. First, a 11% growth from same branch revenue, including an estimated bill rate improvement of about 2% for the rest of the year. Second, we are expecting 1% growth from new branches, net of those that we have closed the past year. And third, we anticipate to continue to have 1% positive impact of revenue related to currency fluctuations, as compared to year ago. And then fourth, as Joe just discussed about our staffing workforce, we anticipate that will add 5% growth in the revenue in the second quarter. We also provided revenue and guidance for 2004 as a whole to be in the range of one billion and 10 million dollars, $1.01b to $1.03b, which is 13% to 16% growth for the year. This growth for 2004 is expected to come mainly from the following items, categories, 10% growth in same branch revenue, that's ranging from the 12% that we just reported in Q1, taper it down to 8% by the time we get to the end of the fourth quarter, which is where we've already experiencing some pick up in 2003 in those growth rates. Second, we continue to see the new branches that supply about 2% growth rate in revenue and third, the Spartan workforce branches for the year as a whole will contribute 4% since it didn't have any revenue in the first quarter in our consolidated results. The three quarters combined, will be a 4% impact for '04, and then the other -- the last item that's significant to point out is the loss of one week of revenue due to shifting from a 53-week back to a 52-week. This change will result in a loss of 9% of our revenue in Q4 due to losing of 7 billing days.

We are really excited about the continued improving trends in our same branch revenue growth and have showed consistent improvement in the demand for our services which is translating into more stable operating environment for our branches each day. I'll discuss with you some of the trends we are seeing in our gross margin. In Q1, we started at 29.1% which was 10 basis point short of our expectations and lower than prior year by 40 basis points. As mentioned in our last conference call in February, we were expecting lower margins, gross margins that we had experienced in Q1 of '03. Now, it's mainly related to workers' compensation and payroll tax increases. Compared to a year ago, workers' compensation increased 40 basis points of revenue and payroll taxes increased 30 basis points. As stated earlier, we've increased our bill rates by 1.7% over the prior year which has helped gain back some of these cost increases. However, we did not get all the cost increases passed through in our bill rates this quarter. Also much of our sales growth in Q1 was from our light industrial customers, which typically has slightly lower margin than our construction customers. This slight shift in business mix has caused our blended gross margin rate to decline in Q1 as compared to that mix a year ago by an estimated 30 basis points.

We are pleased although, we have shown a continued improvement in our gross margins each month throughout the first quarter and we expect those improving trends to continue. The gross margins in our new Spartan workforce branches are slightly lower than our historical nationwide average gross margins partly for two reasons. The first, gross margins in Florida tend to be slightly lower because of a very competitive arena. Second, the Spartan workforce branches serve a higher ratio of light industrial customers than our Labor Ready branches, which again typically a slightly lower gross margin than the construction customers. The combination of these items, that's the business mix shifting slightly due to strong growth rates in light industrial nationwide and the impact of the Spartan workforce purchase will result in Q2 gross margins to be approximately 29.1% versus the 30.1% in Q2 of last year. For the year as a whole, we now expect a blended rate of gross margins to be 29.3% in 2004 versus the 29.9% posted in 2003.

I'll speak now of the Selling, General and Administration cost. In Q1 as a percentage of revenue SG&A was 27% as compared to 30.6% in Q1 of 2003. The main item driving our reduction in SG&A percentage is the growth in the revenue as discussed earlier in this call. SG&A cost were in line with our expectations at the revenue levels reported. We plan to continue to hold the line on operating expenses in 2004. By controlling costs, while revenues are showing improvement, we are expecting to show the leverage we have available on our business model by reducing the annual SG&A percentage to under 24% for 2004 as a whole compared to the 25.4% in 2003. While most of the reduction is related to the continued higher revenue volumes our average branches are producing, some of those reduction in SG&A expense ratio is coming from the lower expense ratio our Spartan work force operations have to each revenue dollar produced.

Although our new Spartan work force branches helped slightly gross margin as we just discussed, they also have a slightly lower SG&A percentage, which allows those branches to produce margins on income from operations similar to our average existing branches. By leveraging our operating costs with increased revenue volumes, we expect to improve operating margins by over 1% during 2004 to approximately 4.8%, 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. Assuming same branch revenue increases 10% annually over 2005 and 2006 along with keeping our expenses in line we can continue to move our operating margins up 1% per year over the next two years and our net income after tax would hit 4% of revenue in 2006. Our income tax rate for 2004 is expected to be 40%. Our estimated net income per share for the second quarter is expected to be $0.14 to $0.15 and estimated net income per share for 2004 as a whole is expected to be $0.55 to $0.58 on a fully diluted share account of 52.2m shares. With this I'll open up the call for any questions you may have.

At this time, I'd like to inform everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Adam Waldo with Lehman Brothers.

Hi, good morning everyone. Congratulations on a well-executed quarter.

Thanks Adam.

A couple of questions both about the quarter's results and also about your increased 2004 guidance after what is very definitely a very comprehensive and quantitative discussion of each. I just want to clarify what kind of pay rate inflation trend you saw in the quarter relative to the 1.7% average bill rate increase that Steve spoke about.

I will let Steve answer that.

The pay rate inflation 1% compared to that 1.7% inflation in the bill rate.

And Steve are you expecting something similar or may be a little faster in terms of what's assuming your balance of your guidance?

I think our expectations are looking for a 2% improvement in the bill rates for the remaining of the year and holding that pay rate inflation about where it was in Q1.

Okay. Jo, one of the strategies that you spoke about obviously was very specific new office opening plan for the balance of the year both in the press release and in the call. I wonder if you could help us skim through whether you expect in 2004 to continue your past practice of trying to bunch all of the office openings for the year into the first and early second quarters or whether we would expect some change in that past practice this year and may be give us some early indication of how you are thinking about the 2004 branch office network growth outlook?

The last part of that question. Let me come back to it because, well I'll address the 2004's, is that you what you meant for the outlook?

Jo, what I was trying to get at is, are you expecting that all of your office openings in 2004 will again be grouped into the first and second quarters as has been the company's past practice or would you expect meaningful office openings during the second half of 2004?

We are going to stick to that policy that we have already given. All the openings that we have planned right now Adam, is in the first -- have been done in the first quarter and the ones we announced for the second and I give Gary and John, you know, a lot of leeway in managing a portfolio of 825 offices and if some office just isn't cutting right, have the authority to close it, if they see an opportunity for a branch where there is lot significant demand that can ramp up really quickly, they have the opportunity to open that we are talking there, you know a handful here or there.

Okay.

Substantially, all we can say that by the end of the second quarter.

And any sneak preview on how we should think about net office base growth for 2005?

That's what I thought you were referring to.

Yes, sure. Sorry.

I was confused when you said...

Yes, sorry if was confusing.

Not right now. We generally put those plans together by the fourth quarter of 2004 for the next year and probably start talking about that in September or October. Adam, I think it is wise for us to kind of wait and see how the economy continues. We expect that it will continue to be recovering and continue to be strong and that would influence our decision. But, we are not speaking to more than a 4% to 5% increase in our pace.

Okay.

As we are going to balance that with the earnings being generated by our existing regions.

Okay and just a one final quick one for Steve. The workers comp expense accrual has upset your staffing revenue assumption underlying your 2004 guidance. Could you compare and contrast that with approximately 8.1% you've reported during the first quarter?

What we expect for the rest of the year?

Yes sir.

Yes, we don't expected it to increase towards that. We have just came off of about an 881 and expect that actually through the year to fluctuate right now. It going to be a probably a 7.9 and 8.1 number for the year somehow.

And that's consistent with something as latest review.

Yes.

Okay, thank you all.

Thank you Adam.

Your next question comes from the line of Craig Peckham with Jefferies.

Hi, good morning Joe and Steve.

Hi Craig.

A question, sort of current events here. The legislation on worker comp in California was of course in Fresno last week. I wanted your thoughts on how that might impact you in the timing therein. And secondly, if you could give us a snap shot in terms of how much of your revenue and how much of your work comp expenses comes out of California these days. And then I have one follow-up question?

Okay. Well although we are pleased those workers comp is on the agenda in California being discussed, we continue to be disappointed that its not moving quick enough and it's not pinpointed enough. We continue to support legislation, continue to support giving them our thoughts and participated in industry meetings and do all we can to help to advance them all down there. Just a last set of legislation that we are through with somewhat in our opinion among the some small that although, if the concepts are right these put some bureaucracy behind that that make it difficult to implement and what they really want to do is give employers more control over helping these injured workers get back to work which is great. Because that is what we want to. We want to take care of these injured people in the best method possible, give them the best medical care, get them the best physical therapy, and get them back to work, that is our goal. In the past, California has really slowed that process down by allowing the employees to go to whatever healthcare provider they want to go to and slows the process down because those healthcare providers, it has been known that they haven't always has had the best intentions in mind to get that person back to work as fast as they can. It might be to milk the healthcare bills or such. California has legislated that over the years and had allowed it to happen. They have now put in place some new legislation that on the surface looks like they want to give some of this control back to the employer, but they put a bureaucratic process in place to make it happen. And what we hope is that that continues to clean this up, which we support and a lot of help out there. As for as disclosing how much of our work comp is in California, we don't go there. We don't have that broken down like that. About 18% of our revenue is in California and a higher than average nationwide cost is in California. So, we just had an 8% cost nationwide that we have disclosed here today. I can tell you that California is higher than 8%, it brings our average up. So it is a very important initiative to us, something we stay focused on. Is there a follow-up question?

My follow-up was on the topic of gross margin and as the UK branch phase grows, what kind of impact should we expect that to have on your gross margins given the relatively different nature of the market over there?

Right now we do not anticipate it will change our gross margins significantly, anything it will help to improve it. You get a slightly higher gross margin over there than our nationwide or companywide average. It's not a negative impact, but it is not such a large upsize that it is going to sway the numbers dramatically. It is real close to our company average right now -- slightly better now.

And the build out in London, competitive landscape there is such you shouldn't expect much change?

It's early. We only have 1 branch there right now. We are opening another five or six as part of this year's opening. So, we will end it up with seven branches in London. It is too early to tell correctly, but we don't anticipate it being unchanged right now.

We see London as a quicker ramp up, possibly because of the density, but the margins would probably be the same.

Okay. Thank you.

Our next question comes from the line of Mike Werner with Kennedy Capitol.

Hi. Congratulations on a good quarter. Had a follow-up. Your second quarter assumption for same-store sales, could you repeat that one more time please?

Let me go back, I believe it is 11% for the second quarter. We just came off of that 12, so we provide those 11ish. If you recall back in February, one of our -- our methods of projecting the future was blending a longer period of time in just the last few weeks. We did raise our guidance for the year as a whole because of the positive impact of Q1, but we didn't plug in 12% for the rest of the year. We plugged in 11% for Q2.

Okay.

And then for the year as a whole, we plug in 10%.

That is outstanding.

Which takes us from the 12% that we just reported in Q1, tapering down to 8% by the time we get into the fourth quarter.

Okay. Did you mention, what your -- I don't know if your mentioned this, your average revenue process, how are they, if you could just state this from a higher level if you don't want to go into specifics and in the Northeast, I know that you are trying to get those up to where they may --where possibly they could be in the -- on the West. Do you think that trend is getting to that point or are you still working on that?

I can answer the Mike. We can talk about it more by area if I can and the Northeast is clearly coming along through our expectations in some parts of the -- exceeding those expectations. So, as you are referring to Mike it is the age of the offices on the West coast, they are obviously older than the East coast and many of those East coast offices in the Northeast opened just prior to the recession. With this recovery, they are going really nicely for us. Almost every region in the country has grown, some more than others. Some of the greatest growth is in the Midwest actually with the manufacturing activity increasing, but the Northeast is also posting some very positive numbers as well. Florida at the Southeast is against some tough comps as we mentioned on the call in the past. The Southeast, then seemed to see a recession, it just kept growing itself. We are growing on top of significant growth over the prior year. But we were going to get those averages up there for sure and the offices are doing well right now in this current environment. We were happy with the layout of offices we have in the East as well.

Okay. That is all I had. Congratulations and good luck to you.

Thanks Mike.

Again, if you would like to you ask a question, please press star and the number one on your telephone keypad. Your next question comes from Mike Carney with Stephens.

Hi good morning. Congratulations of course.

Thanks Mike.

Yes. Most of my questions have been answered, one question on the workers comp expense, 8.1% of revenue. Now, if you assume that this year, you are going to see a shift towards lower risk, may be light industrial workers, why is that increasing from last year severity?

That accrual estimate that we came up with at the beginning of the year is based on at least a 7-year weighted average of our business mix and as our business mix does shift, Mike, you are right on point that we should see net work comp subside, but it won't subside that quickly because our actuaries were not helping us in guidance in the direction, the business mix portion of it. It takes a while for that to blend in, but it is something that you could watch for it, just that it will come in knee-jerk reactions, it might be, you know, as I have given guidance here to date 7.9 to 8.1 would include that, but if we were come in at the lower end of that 7.9, that would be because there was a slight change in our business mix, but the -- we really kind of put stake in around early in the year of what we think it is going to be and then we get quarterly updates on the actuaries to help us understand how we are moving towards that -- taken the ground if you will and really that initial estimate of about 7.9 to 8.1 or 8.2 is where we see it right now.

Should you give the -- you have any guidance on the mix in workers comp?

No, we don't break that down like that. It is just a general mix overall. It drove it slight, from here to here, this is in a new phenomenon for us, if we go through this. Last year construction was growing and manufacturing was often to that, that would have--

I am talking about severity versus --

Right, I would have not that broken down like that, Michael.

Thank you.

This concludes today's conference call, you may now disconnect.

Okay, thank you everyone.