TrueBlue Inc (TBI) 2004 Q2 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. As this time, I would like to welcome everyone to the Labor Ready second-quarter earnings conference call. All lines have being placed on mute to prevent any background noise.

After the speakers’ remarks there will be a question and answer period. If you have any questions during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad.

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

Good morning. This morning, Labor Ready President and CEO, Joe Sambataro and CFO Steve Cooper, will be discussing Labor Ready’s 2004 second-quarter earnings results which were announced after market close yesterday. Before I hand you over to Joe, I ask you 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 filing with the Security and Exchange Commission including the report on Form 10Q filed May 3, 2004.

I’ll now turn the call over to Joe Sambataro.

Thank you Stacey. Good morning everyone. Yesterday we announced that revenue for the second quarter ended July 2nd increased 24% to $267m, and that net income for the quarter improved 94% to 21 cents per diluted share as compared to 12 cents per diluted share for the same period a year earlier.

The Labor Ready team delivered another fine quarter that demonstrated the power of our business model and the advantages of our continued focus on driving higher profitability from existing branches, expanding into new markets and leveraging our recent acquisition to better serve our customers. Our operators and support teams have successfully increased our gross margin while controlling cost.

This combination is what drove our 94% increase in net income. I am very proud of their accomplishment on behalf of our shareholders. Our team understands shareholder value and delivers it. I’d like to update you on the progress in each of our four strategies.

Our first strategy and continued focus is growing the revenue and profitability of existing branches. We announced that sales from branches opened 12 months or longer to approximately 15% in the second quarter over a year earlier. While the growth percentage is somewhat enhanced by the fact that our sales were soft in the second quarter of 2003, we have been quite pleased with the growth in same-store sales throughout the first half of this year.

We have also exceeded our own expectations of a four to one ratio between same-store sales and net income that we have spoken of before, that is, if same-store sales were to increase 15%, net income would increase 60%.

We have also reiterated the guidance we just gave on June 1st for sales and increased our net income guidance for the year to be 62 cents to 65 cents, an increase of 66% to 77% over 2003 where net income had already increased 51%.

We continue to look for opportunities to leverage our position as the only company in the temporary manual labor sector with a national and international footprint, to serve customers with multiple locations. For these businesses, no temporary staffing company in our niche approaches the flexibility and capability of Labor Ready.

As we announced in May, Yolanda Hubbard has joined our team to bring greater focus and results in this area where we are truly unique. Any additional sales will be filled through our existing branch structure adding to the same-store sales that generate our profit leverage.

Our second strategy is expanding in the smaller markets, in the US and Canada which allows us to serve a secondary market place. We completed our 2004 branch openings during the quarter, opening three branches in the U.S for a total of 27 new branches in 2004. We are pleased with the performance of these branches to date and the sales and profits we expect them to generate in 2005 and beyond.

Our third strategy is to continue to expand our operation in the UK We opened two branches in the second quarter, for a total of five branches opened so far this year in the UK. One more branch is expected to open in the third quarter. We continue to see the opportunity to operate between 100 and 125 offices in the UK. Once we open the branch in the second quarter there will 51 branches in the UK

The fourth strategy which we introduced last quarter at this time is further penetration of existing markets and customers with additional brands and diversification in the semi-skilled staffing services.

On April 5th we acquired 25 branches from Spartan Staffing with the intent to operate their two brands Workforce and Spartan, staffing side by side with Labor Ready, expanding our reach and service to small and midsize businesses and building on the reputation of all three brands.

Spartan Staffing contributed 7% to our revenue growth this quarter. We see the opportunity for continued growth and diversification in this model. We opened two additional Spartan Staffing branches in the second quarter and now operate a total of eleven Spartan Staffing branches and sixteen workforce locations.

By strategically aligning the markets and services of manual labor with semi-skilled staffing customers benefit from our ability to serve their needs with a slightly wider range of services that may now include both the daily dispatch, manual labor, and the longer term semi-skilled staffing employee.

Once again pricing improvements improved gross margins and holding operating costs in line led the way toward a solid quarter of results. We are also pleased with the continued quality growth in our same-store sales and the progress being made in our newer branches. Our value proposition has never been stronger. Business owners short on time under continued pressure to control costs while growing their business can turn to Labor Ready to provide everything from site clean up crews to CDL drivers. We are the choice for businesses that needs dependable temporary workers on demand.

Overall we are pleased with the way Labor Ready is participating in this recovery cycle and our ability to put people to work. We continue to leverage the operational efficiencies of our company and are very pleased to deliver these results to you today.

At this time I will turn the call over to Steve Cooper, our Chief Financial Officer who will provide more detail about our strong performance this quarter , including details about our better than expected top line growth and gross margins.

Thank You Joe, good morning. As previously noted revenue in the second quarter increased 24% as compared to the second quarter of 2003. This was our fastest growing growth since 1999. The increase in revenue during the quarter primarily came from the following three components:

First, branches opened one year or longer increased 15 % including a 2.2 % improvement in the average bill rate per hour compared to a year ago. Second, new branches opened less than one year contributed about 2% of our revenue growth. And third, the Spartan and Workforce branches we purchased at the onset of the second quarter contributed 7% of our growth in revenue.

Today we provided guidance for the third quarter that revenue is expected to be $292m to $298m that would be 15 - 17% growth over the third quarter of 2003. We expect 8% of that growth to be from same-branch revenue, those branches that are open one year or more. We also estimate growth from new branches of approximately 2% and the newly acquired branches to contribute about 7%. We also reiterated previous revenue guidance for 2004 as a whole that was given on June 1st, to be between $1,030,000,000 and $1,040,000,000 or approximately 16% growth over 2003.

We estimate that growth for 2004 to be broken down as follows. One, 10% growth in same-branch revenue, two, 2% growth in revenue from new branches for the year as a whole and three, 6% will be contributed from the newly acquired branches and four, I need to point out again that we will have a reduction in revenue related to the loss of one week of revenue in Q4, as we move back to a 52 week accounting year versus the 53 week year we had in 2003. This change will result in a loss of 2% of our annual revenue and a 9% loss in revenue for the fourth quarter alone.

Our gross margins in the second quarter were 29.9%. As mentioned in our last conference call in April we were expecting lower gross margins of 29.1% in Q2, compared to those that we had experienced a year earlier of 30.1. Our lower expectation for the quarter was built on the actual margin we had experienced in Q1 of this year of 29.1%. During May and into June, we have seen higher margin seasonal work making positive contribution to our gross margins, along with a positive shift in our mix of bill rates we charge our customers. Some of this shift was attributed to the turning away of low priced work and part of the shift was attributed to increasing the bill rate in certain areas of our operations. There was a 2.2% growth in the average bill rate charged in Q2 as compared to the same quarter a year ago.

In addition to the bill rate mix and the positive impact during the quarter, we experienced lower costs related to our workers’ compensation programs of 30 basis points of revenue, as compared to the first quarter of 2004. We had earlier expected the cost of workers’ compensation for 2004 to be about 8% of revenue. We now expect that cost to be about 7.7%. The reduction in the workers’ compensation cost is related to various prevention measures that we have implemented that has reduced our accident rate. On a year-over-year basis we expect the lower cost in workers’ compensation to continue throughout the remainder of 2004. We now expect gross margins in the third quarter to match 2003’s third quarter of just over 30%. This is a great improvement in our Labor Ready branch gross margins from Q1. (Technical difficulty).

So far our blended margins have turned out to be about 30%. The Spartan/Workforce branches tend to reduce our overall blended margins by about 50 basis points, therefore, our Labor Ready operations are producing almost 30.5% gross margins, which a year ago, they were at 30.1. We are very pleased at that gross margin performance and it has not hindered our ability to grow the top line.

Selling, general and administration costs for Q2 as a percentage of revenue were 22.6%, as compared to 25% a year earlier. The driving force in our reduction in SG&A percentage is the growth in pro branch revenue. At the revenue levels recorded, SG&A costs were in line with our expectations. We plan to continue to hold the line on operating expenses. By controlling operating 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 approximately 23.5% for 2004 as a whole, almost 2 full percentage points less than 2003.

By leveraging our operating costs with increased revenue volumes we expect to improve operating income margins to 5.1% of revenue for 2004 as a whole, from 3.6% in 2003.

Our income tax expectation for 2004 remains unchanged from the first quarter at 40%. Our estimated net income per share for the third quarter is expected to be 26 to 29 cents and estimated net income per share for 2004, as a whole, is expected to be 62 to 65 cents on a fully diluted share count of 52.2 million shares.

At this time we would like to open up the call for any questions you may have.

At this time I would like to remind everyone, if you would like to ask a question press star (*) and the number one (1) on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question is from Craig Peckham with Jefferies.

Good morning Steve and Joe. Joe I wonder if you could spend a little bit of time walking through the logic and strategy, and I suppose some of the decision factors that dictate where you open new branches on the Spartan side.

Craig, we are currently in the middle of that process right now of planning 2005 and beyond. We are going to start obviously with 2005. The couple of Spartan braches we opened recently were, what I call ‘slam dunks’, we can open it up, they have got customers waiting for them, and we can ramp it up when people are ready. So we might see a couple more of those and we also have some on-sites in Labor Ready that we are going to put under the Spartan leadership which are more like staffing. That is our 2004. But they are going to be ramping up quickly or built around a base of a customer that is already there.

Looking forward, the executive team and the strategy teams have been working on how to roll out Spartan on a nation-wide basis. That is not going to happen all in 2005, because we need to meter that growth, both from the stance that it takes some earnings to do that, as well as human resources. How we are looking at the country right now is -- and we are right in the middle of this Craig, so we don’t have any details, but the strategy is to look at parts of the country where Labor Ready has a foothold of customers that have some staffing needs as we understand them and evaluate if that is a good location and how quickly it would ramp up. So we are going to go to those first. Spartan staffing also has a good reputation in Florida, in parts of the Southeast, and we think there is a real natural for organic growth.

On a very selective basis, if there is a market we want to penetrate and we don’t see the necessary quick ramp up with a Labor Ready base, or with a Spartan reputation, then we are going to be very selectively looking at target acquisitions in those cities, probably of a size similar to Spartan. So as I said, we are in the middle of this process right now, we are intending to present our plans to our Board of Directors in September, refine them, and then in the fourth quarter as we usually do, present that to our investors.

Can you compare the cost of opening a new Spartan branch with a traditional Labor Ready new store model?

It is actually pretty similar to a full Labor Ready as opposed to an express office. As you know the express offices are slightly less, but a Spartan office is very similar to a Labor Ready office.

Ok thanks.

You bet. Thank you, Craig.

Your next question is from Abraham Fisher (ph) with Harris Nesbitt.

Hi. Nice quarter. Can you talk a little bit about how your sales trended intra-quarter, like what does July look like so far this year?

Sure, I am going to quote the same store sales since that is the most comparable revenue supporting the overall sales and throughout the year it's had some variation in how it has looked. So, I’m going to go back to January and remind you how the first quarter looked, as this is actually driving our revenue guidance for the third quarter.

January, same-store sales of 9.1%; February, 11.2%; March, 13%; April, 17.4%; May, 18.6%; and June, 12.1%; and heading into July, slightly less than the June run rate.

Alright.

That has driven our guidance for the third quarter. Now, as Joe mentioned, part of April and May -- and we expected this, but those were stronger months due to the softer conditions that we saw in 2003 in those two months.

Okay.

And if you recall, our results softened up in 2003 due to the onset of the war, the changing conditions in the economy and we actually saw a slow-down in April/May of 2003.

When we hit those months this year, it’s not that our sequential volumes actually increased month-to-month this year, except for seasonally adjusted reasons, it’s that last year was softer.

Now heading into July, we don’t have concerns that things are slowing - it’s just the way the year-over-year is coming out. We actually are quite -- feeling quite positive about the momentum that exists for staffing needs in small and medium businesses here in the United States especially.

You mentioned the change in average billing rates?

Yeah.

Do you have the average wage rates during the quarter as well?

Sure. The average bill rate for Q2 was $12.53 and the average wage rate was $7.05. So, the bill rate has gone up just over 2% and we held the pay rate to about 1.6%. So, there was an actual increase in spread there, which was really in relation to the other employment costs that we have, the workers’ compensation and the payroll taxes that we talked about so much in the first quarter.

Right. I have - - I’m sorry to take up the time. I have just a few more questions.

No, that’s what we’re here for.

The tax rate was a bit higher than we'd expected. I’m wondering if there any reason why, and what kind of tax rates we should model into our 3Q and 4Q?

Yeah. We’re looking at 40% for the year as a whole. We spent quite a bit of time in our first-quarter conference call talking about this, as the tax rate at that point in time was when it jumped up to around 40%.

There are a few components driving that. Number one, it’s nice to have more taxable income, but at that same point, our incremental rate is actually running higher than our effective tax rate. Therefore, each incremental operating or taxable dollar is taxed at a higher rate and it’s driving our effective rate up as the taxable income moves up -- it’s nice problem to have, however, as those fixed adjustments go -- are fixed, you know the average goes up. Number two is being driven by the fact that we don’t have any of our worker opportunity tax credit in our accrual rate this year as that has not been passed yet, that bill has not been passed. We somewhat expect it to be, but have not put it in our tax rate until we know for sure that we’re going get those worker opportunity tax rate credits, which have been running about 1% -- driving the tax rate down about 1% is what we would expect, if those came through.

How’d you -- when would they come through?

Well as soon as we hear from the --

-- it’s past the -- it’s in the -- a rather complex bill right now, it’s past the House and the Senate, but it’s in conference. We think this aspect will probably be passed, but we don’t know that for sure so, you know, conservatism dictates that until Congress and the Senate passes it in final form, we’ll just hold off. They do intend it to be retroactive to January first.

Okay, could you put a little more color into the office closings during the quarter, and just - I know you mentioned some plans to close more offices this (technical difficulty).

No -- I’m sorry I missed your first name.

It’s Abraham.

What is it?

Abraham Fisher

Abraham? Okay Abraham. We have a portfolio of 831 stocks, like if you were a manager -- and so our branches are, there’s always going to be a little bit -- a few closing here and some openings there that are opportunistic, but generally it’s not more than a few each quarter, so it’s really not material.

Okay. With -- regarding the Spartan acquisition, any surprises that were, you know, positive or negative that you’ve gotten in the few months that you’ve had it in your portfolio?

Yeah, I’m pleased to report -- this is a good model for future acquisitions. One it’s accretive on day one, which is our requirement going forward as well. Two, some very positive surprises were that, the way the team at Spartan and our team in Florida at Labor Ready handled this, there was no significant loss of customers. In fact, the weeks after the acquisition, they continued to incrementally increase their sales, so I’m very pleased with that.

The management talent that came with the company, you know, that was independent of the owner, who sold and retired, is of an extremely high caliber and fits very well into our organization both in the sense of values and culturally.

We’re in the process now of taking some of the administrative work off of them as they were as a private company -- accounting payables, workers' comp, they are in our systems now, so that the leaders in that company can spend more time growing -- you know, growing Spartan and talking to customers. So it’s all been very positive.

Yes.

So I think we've got a good model, this is our first one. We didn’t smother them, and the entrepreneurial spirit is alive. So it’s a good model for our future and we’ve been very pleased.

Any pockets throughout the company of strength or weakness during the quarter, you know, either geographically or in different areas?

No, not -- you know, it's been rather consistent throughout the country, it’s always going to be a little better here, a little -- you know, there but mostly consistent and across industries.

And finally, last question. You said on the call that your expectations for operating margins, I was just wondering if you could repeat that?

Sure -- Steve is just looking that up.

Okay. You’re referring to the operating percentage margins that we talked about?

Yeah.

Yeah I believe that for the year we’re expecting the -- I’m sorry here, I just buried my notes on that but -- the operating income margins for 2004 as a whole to be 5.1% of revenue versus a year ago 2003 as a whole was 3.6%, so an improvement of 1.5% of revenue at the operating income level.

I just missed that when you said it. I appreciate you going back

No problem.

Thanks so much.

I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad. Your next question comes from Adam Waldo with Lehman Brothers.

Good morning gentlemen Matthew Keating standing in for Adam Waldo. I was wondering just a quick follow up question if you could provide your permanent staff for dispatch office number metric.

I think the number that we’ve been giving is the total number of -- yes, the permanent employees including our corporate office and everything. And at July 2nd 2004 that’s 2,928.

Okay great.

Versus a year ago where it was 2,737.

Okay great thanks a lot. Additionally I was just wondering if you could talk about some of your plans or how you’re looking at average bill rate versus pay rate spread for the balance of 2004?

Yes we intend it to hold about the same spread that we’ve had so far which is about a half a point difference right now. If we could hold the bill rate improvement to about 2% through out the remainder of 2004 then the pay rate growth to only 1.5% then we’d be pleased as payers that we can do that.

Great thanks a lot.

Your next question comes from Jim Wilson with JMP Securities.

Hello thanks, good morning guys. Most of my questions have been answered I just actually, Steve, was looking at the balance sheet and it doesn’t have all the details, as you always have in the Q, but workers' comp claims, was there anything or is there anything changing on the liability side or is it simply the growth and change due to Spartan being added in or was there anything truly changing one way or the other. I guess you could throw in has Spartan's experience with workers' comp been particularly any different than yours?

Okay a couple of question there. I’ll address the balance sheet side. The workers' compensation liability has shown growth throughout the quarter as expected because as you are aware, we add to that as we add payroll hours throughout the year. And the payment pattern doesn’t match exactly as we add payroll hours because we accrue this liability and then we pay it out as we pay the doctor bills and pay these injured workers over time. So there is growth in the liability that’s faster than sales growth actually. That’s because of the size of the balances but we really stay focused on that P&L entry which is the expense driven side which is a ratio of how much we’re expensing per payroll hour paid. And that’s where we’re seeing a significant drop due to the number of accidents coming down. Now it’s slight, the number of accidents improvement is due to some of these prevention measures that we’ve talked about but we’re seeing about a 10% drop in our accident rate nation-wide and even a stronger drop in our accident rate in the state of California which has been one of our troublesome states as we’ve talked over the last couple of years. So we’re really pleased with the trends of workers' comp, that they’re not out of control, they’re stabilizing and we have our handle on it.

All right is that 10% down in total or 10% down per employee per dollar?

It’s 10% -- the accident ratio as it compares to the number of hours worked.

Okay

So on a consistent basis on the hourly we put, you know on each 10,000 hours billed it would be a good way to look at it. It's dropped -- the accident ratio has dropped 10% over a year ago. Now you asked a question about the Spartan piece and how does it drive it, and Spartan’s business is so close to our Labor Ready business that their rates are blending right into our own, they’re really not driving it up or down.

Good. Great, okay, very good quarter.

Thanks Jim.

I would like to remind everyone if you would like to ask a question press star then the number one on your telephone key pad. At this time there are no further questions. Are there any closing remarks?

Yes we thank everyone for participating this morning. If you have any further questions you know that Steve and I are always available and have a great day. Thank you.

This concludes today’s Labor Ready conference call. You may now disconnect.