TrueBlue Inc (TBI) 2009 Q1 法說會逐字稿

Good day everyone, and welcome to TrueBlue's conference call. Today's call is being recorded. Joining us today is TrueBlue CEO Steve Cooper and CFO Derrek Gafford. They will discuss TrueBlue's 2009 first-quarter results which were announced today. If you have not received a copy of this announcement, please contact [Theresa Burkland] at 1-800-610-8920, extension 8206, and a copy will be faxed to you.

At this time I would like to hand the call over to Ms. Stacey Burke for the reading of the Safe Harbor. Please go ahead Ms. Burke.

Thank you. Here with me today is TrueBlue CEO and President Steve Cooper, and CFO Derrek Gafford. They will be discussing TrueBlue's 2009 first-quarter earnings results which were announced after market close today.

Please note that our press release and the accompanying income statement, balance sheet, cash flow statement, and financial assumptions are now available on our website at www.TrueBlueInc.com.

Before I hand you over to Steve, I ask for your attention as I read the following Safe Harbor. Please note that on this conference call Management will reiterate forward-looking statements contained in today's press release and may make or refer to 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 our most recent Forms 10-Q and 10-K.

I will now hand this call over to Steve Cooper.

Thank you Stacy. Thank you for joining us today to discuss our first-quarter results and our outlook for the second quarter of 2009.

Today we reported a first-quarter net loss of $5 million, or $0.12 per share, compared to our earlier expectations of a loss of $0.15 to $0.20 per share. Our better-than-expected bottom-line results were driven by aggressive and well executed cost management throughout the organization. Although demand for our services has fallen over the past year, we have successfully executed our business model by scaling our costs to match the current demand.

Revenue in the first quarter was $224 million versus our earlier midpoint expectation of $225 million. Although we had seen our revenue trends declining throughout 2008 and actually worsen during the fourth quarter as many clients shut down their operations for extended periods of time, we did see some moderation to the steepness of the declines starting in mid January and things moderate to the point that we were able to accurately forecast our first-quarter revenue.

There is an important point that with some moderation in the declines that we were able to better project our revenue and therefore set our cost structure appropriately. That is exactly what we did during the first quarter, and it has had a significant impact on our results and will have an even more dramatic impact when business trends pick up and our strong operational leverage kicks in.

We have and will continue to match our own cost structure to the current demand level as this is the strength of our business model. Just as we experienced significant operating leverage after the last recession, we are confident we will experience this again, and this recession -- as this recession moderates and starts to recover, we will be the first to see it and enjoy that strong bottom-line impact with any slight pickup on the top line.

Our year-over-year declines we are experiencing continue to be broad-based across most industries and all geographies that we operate in. Our transportation brands, PlaneTechs and TLC Drivers, have shown consistent year-over-year results while our three brands that operate mainly in manufacturing and construction are -- experienced the most significant declines we have seen so far during this recession.

The most significant cost control actions taken during the quarter included closing 40 additional branches bringing our total closures since the beginning of 2008 to 142 branches. We have also reduced headcount in the open branches and in our support and corporate headquarters. Derrek will give more details about the specific cost cuts we have made here in a few minutes.

Acquisitions completed during the last 12 months contributed 5% to our revenue growth, which is down from the 13% increase in revenue from acquisitions during the fourth quarter as we had hit the anniversary of almost all of our acquisitions at this point and only expect about 1% additional revenue from the acquisitions during the second quarter. We have not made an acquisition of a company since the end of April 2008 as we have been and remain cautious with our capital at this time.

As we work through 2009 we will continue to approach controlling our cost structure much like we have done during 2008 and now into the beginning of 2009. Each month as we continue to analyze our trends and results, we will stay diligent in making the appropriate changes to our cost structure by closing underperforming branches and scaling management and support costs to manage match the demand for our services. We do this to ensure we stay financially strong and to help us be prepared to grow our cash flow when economic conditions turn.

Our sales and service teams are extremely focused on serving our customers to help them balance their own cost structures, and we are proven to be a great business partner for them during this time.

Our team that is tracking the projects included in the economic stimulus plan being developed have made progress. Most of these projects though will not start until late 2009 or into 2010. We are ready to provide labor quickly for each project at the general contractor or subcontractor level on these projects. We believe with the relationships we have in place and our approach to placing both general labor and skilled labor in the construction industry will provide us several opportunities to serve our customers as they ramp up their businesses quickly to take on these projects as they become available.

We believe that our niche approach to branding and going to market has set us aside as a leading provider of blue-collar staffing. While the business conditions are difficult in most of the niches we serve, we remain extremely positive about the long-term opportunities available to us and our ability to better serve the markets and customers we have identified in the blue-collar industries, which will be the first to grow as the economy begins to improve.

We also have a couple of new brands, Spartan Staffing and TLC Drivers, that each has the ability to be expanded nationwide, which we will focus on doing once the economic conditions pick up. We have a strong financial position that will help us capitalize on growing our business, and we look forward to the opportunity to participate in industry consolidation as smaller competitors continue to struggle through this economic cycle.

At this time I'm going to turn the call over to our CFO, Derrek Gafford, for further details on our operating and financial trends, and then we will open up the call for questions.

Thanks Steve and good afternoon.

Net loss per diluted share was $0.12 for the quarter, which was better than our expectation of $0.15 to $0.20 of net loss per diluted share due to aggressive and well executed cost management. I will provide some additional background on these actions as we discuss our operating and financial trends.

So let's shift to revenue trends for the quarter, where I will add some follow-up commentary to Steve's overview. We continue to experience declines in our monthly year-over-year same-brands revenue trends this quarter. The decline in same-brands revenue moved from 30% in January to 35% in March.

For the second quarter of 2009 we expect revenue in the range of $225 million to $235 million, which is a decline over Q2 last year of about 38%.

We expect net loss per diluted share for Q2 2009 to be $0.02 to $0.08 per diluted share.

Now let's discuss the trends in gross margin. Our gross margin for the quarter was 27.9%, which was at the low end of our expectation of 28% to 28.5%. The lower gross margin is attributed to a higher spread between bill and pay rates and a larger mix of revenue from lower gross margin brands. Bill rate inflation for the quarter was 1.6%, and pay rate inflation was 2.9%.

We're off to a solid start during 2009 in controlling work-related accidents. Our accident rate is down by almost 15% this quarter in comparison with Q1 last year. To provide some historical perspective here, our accident rate this quarter is down by 60% in comparison with 2002, when we started implementing additional risk management programs.

The decrease in our accident rate this quarter compared to the same quarter last year was due to three primary factors. One, we continue to have success in the execution of risk management programs implemented in prior years.

Two, we are experiencing considerable success in decreasing accident rates of companies we have acquired, by implementing our risk management programs.

And three, we implemented a chargeback program this year in the Labor Ready brand to ensure the P&L of each branch is charged work comp expense based on actual claims. This is a -- this is significant for us, as branch bonuses are based on branch profitability.

On the claims management side we continue to experience steady improvement in the speed at which we are able to close claims. We believe we can maintain our positive momentum throughout 2009 in reducing accident rates and lowering our Workers' Compensation expense.

Our estimate for gross margin for Q2 of 2009 is 28% to 28.5%.

Now let's address the trends in sales, general and administrative expense.

SG&A as a percentage of revenue was 30.4% this quarter, which was below our expectation of 31% to 32% due to additional expense reductions.

Now let me point out some items that should be helpful in understanding our trends this quarter. Included in the SG&A was $2.4 million of expense from acquisitions that had not yet annualized, and $2.4 million of expense related to severance and branch closings. Excluding the impact of acquisitions, severance, and branch closing costs, SG&A for the quarter would have been $63.5 million. This represents a reduction of $19 million, or 23%, in comparison with Q1 last year.

These cost reductions were largely driven by branch closures and headcount reductions in our branches, field management, and support centers. We have now reduced our total employee headcount by 20% over the past 12 months, and half of this reduction has been accomplished in the last 90 days.

Salary reductions were also initiated for all executives and senior leaders. Pay freezes were implemented for most other positions in the Company. Likewise, employee-related expenses such as travel, benefits, and other related costs have been reduced.

In regard to our expectation for the second quarter of 2009, we expect SG&A to be about 28% of revenue based on the revenue estimate provided today.

Net interest income was about $0.7 million lower than the same quarter last year due to lower yields on invested cash.

Our income tax rate for the quarter was 38.2%, which was moderately higher than our 38% expectation. We continue to expect a tax rate of 38% for Q2 and the remainder of the year.

Let me touch on cash flows for a moment. Cash flow from operations was $4 million this quarter, which is a decrease of about $10 million in comparison with Q1 last year. The drop in cash flow is primarily related to the drop in net income.

In regard to capital expenditures, we expect CapEx of about $5 million for Q2 and about $14 million for 2009.

That's it for prepared remarks. We'll now open the call for questions.

(Operator Instructions). Paul Ginocchio, Deutsche Bank.

Manpower yesterday talked about stabilization trends, and it was noticeably absent from your comments. Do you feel like we are -- at least that the rate of -- it looks like the rate of deterioration is starting to decelerate or get a little bit better. What's your view on that? Thanks.

Thanks Paul. I think that what you just said is exactly right. I would hate to call it stabilization at this point because it's still -- the rate of deceleration has picked up, as Derrek pointed out, that it picked up 5 points just during the quarter alone.

Now, we are happy that it -- the fourth quarter it picked up 10 points during that quarter, so it's -- the holidays and through the first part of January was definitely worse on us than we've seen since then. And as I had mentioned in my comments, it's a little easier to project at this point in time, and we hit our midpoint in guidance, so it came in on expectations, and so we gave that guidance the first part of February.

It's nice to have looked out eight weeks and hit that guidance. It starts giving us a little more confidence of where things are going, but definitely we are not ready to reach out there and say that the economy is settling. We are just one player in this thing, and -- but we like the ability to be able to project and control our own business better. That feels much better.

Absolutely. That was quite impressive you were in the midpoint of your range.

I guess, is it mainly the construction area that is causing the degradation now, or is there some other -- what else is causing the -- I guess the increased weakness? Thanks.

Well, as we've talked about over the last 18 months, this definitely started in construction. It started in residential construction well over two years ago in the hot markets of Florida; Nevada; a little, Southern California; and it started spreading from there.

And we had some head fakes ourselves over the last two years. If you followed us closely during that period of time, you would've seen us call things stable at various points in time. But no doubt when we hit the fourth quarter of 2008 things were different. We were in a different environment, and we went negative deeply in every geography.

Now, as I called out today, a few of our brands are holding pretty good to prior year. The transportation business, the aviation business where we send technicians out to work on aircraft has been holding up strongly. The truck driver business of helping companies manage the compliance and work through that industry, they still need us. So there's been some good spots of our business, but the fourth quarter of 2008 really needs to be worked through now, and it's worked through one quarter. We have a few more to go. And let's see how things look when we get through the summer.

Thank you. If I can just sneak one more in, the 20% of revenues for SG&A in the second quarter, does that include any charges? Thanks.

The second quarter has a little bit in there for some branch closures, so the percentage we gave was about -- 28% is what we would expect. I thought I heard you say 20%, Paul, so (multiple speakers)

Yes, 28%. So how much of that is charges? Can you quantify it?

Oh, there's maybe about $0.5 million in there for branch closures.

Jeff Silber, BMO Capital Markets.

I know there's not a tremendous amount of visibility in your business, but I'm going to try a forward-looking guidance question or a forward-looking vision question. You typically have some seasonality in your business. It's pretty strong normally between 1Q and 2Q and then continues to pick up into the third quarter. It doesn't look like you're going to see a tremendous amount of seasonality going into the second quarter. You'll get a little bit of a bump. If we look out towards the tail half of 2009, do you expect a little bit more pickup from a seasonal perspective?

Jeff, I think you've called it out here. You've seen in our guidance that we did not build as much in heading into the second quarter as normal, because most of that seasonality came from construction, and with our construction percentage being lower overall, the seasonality impact is lower.

So directionally, I think you'll see the third quarter step up about as much as we stepped up the second quarter in relation to prior years, but it won't follow the same prior-year pattern. It will follow more of this pattern that we see from Q1 to Q2.

Now, with that said, as I enter answered Paul's question earlier, we're not going to be the ones to call when this thing turns. There is a lot of stimulus that's been added. There's a lot of good talk. One thing I didn't put in my prepared remarks is some of the good chatter from customers. Those feelings are changing.

I've mentioned to our team -- we've talked about it a lot -- that in this business you go a little bit from selling ice cubes to Eskimos, where there's just no need, to turning it to a little bit -- I need you but at a lower cost. And so Derrek talked a little bit about the gross margin difference and where that is.

We've had enough experience the last six or eight weeks though we feel comfortable that we are in a market where proposals are moving, clients are talking, they are talking about their own business moving. And there's some good signs, but we didn't project a lot of that in because just as we've seen with the stimulus package, it's being drug out a bit when it's actually going to hit. And I think that we are working through a tougher cycle here than anybody had projected. But there's equally good and bad signs from what we are seeing. That's all I can say.

I appreciate that color. Thanks. If I could just get a little bit more detail on the office closings -- the one you did in the first quarter and the ones planned in the second quarter, I'm assuming the bulk of those are in your non-transportation area. I was wondering if you can give us a little more detail on those?

Sure. I can give you the numbers, Jeff. So this quarter out the -- all of the closures that we did this quarter, 10 of those were in the Spartan brand, 10 of those were in the CLP brand, and the rest were in Labor Ready. And as we look forward to Q2, the number that we gave looking forward of 35 branches in the filing of the 8-K that we put out for second quarter, there will probably be two or three CLP branches, two or three Spartan branches, and the rest of those 35 would be Labor Ready.

If I could sneak one more in, was there any Workers' Comp reversals in the quarter? And roughly how much was that?

Yes, there was. So the Work Comp reversal for prior periods was about 110 basis points of revenue.

Jeff Meuler, Baird.

Hi. It's Jeff Meuler from Baird in for Mark Marcon. Not to slice it too thin on the trends, but are you seeing the first couple of weeks of April, was that more around the minus 35, or does it continue to get worse? And then you obviously said you're going to get about a 1 point contribution from acquisitions in Q2. What are you incorporating in the Q2 guidance in terms of -- are you assuming a further deterioration in the same-store sales trends? Are you assuming that they kind of level out at that exit rate?

Well, for the most part, Jeff, really what we've guided for the second quarter is organic revenue of about 38%, so that's about where we left off in March. And as we've taken a look over the last four weeks, the revenue levels would be about where we would expect them, meaning that we didn't see any significant slippage in year-over-year trends. So that's really how we queued up our guidance moving into the second quarter.

We've had easier prior-year comps for quite a while now, but as we moved to the second quarter last year, that's where we really started hitting some deceleration. So I think the bottom line is that as we set our second quarter guidance, it was really largely around what we experienced in the month of March and the first couple of weeks of April.

Thanks for the color. In regards to the pricing pressures that you gave the overall bill rates, could you just provide any more color on how the pricing pressure varies across the brands and whether you are seeing it increase as the economy remains weak for longer?

Yes, the -- it's definitely [acrost] all of the brands that we operate in. There is not one that is not having pricing pressure. It appears we are in the state of the economy where everybody is looking for cost controls. It's not just us. And so as we work through that with our customers and find a fairness balance -- I believe we are finding it. We are not in an environment where it's out of control and we don't believe we can survive and that people are cutthroating. People are just making adjustments and making sure that it's fair and that it's right.

There's a -- at the same time there's adjustments, especially in some of our higher-paying brands, on the wage side, that we don't have to pay as high a wages because it's not as hard to find the staff. So our margins aren't declining, even though you are seeing some bill rate declines. So it's kind of [acrost] all brands, all industries; all things are feeling the pricing pressure. So I'm not sure it's easier or harder in any one of the given brands.

And then just one final one. You guys have obviously done a great job controlling costs. It looks like you've taken out about 19% of your branch network in six quarters I guess -- through the current one with the expectations. How many of those closures at this point are you guys exiting markets versus how many are just consolidating within a given market?

Well, it's a great question. The bulk of these are exiting markets. Not big cities though, in that realm or not big marketplaces. Another branch is able to carry -- cover the territory. However, it's important to realize, when we take a branch out, we are taking the relationships out that existed in that neighborhood, in that given territory where those sales reps were and those branch employees. We take it very seriously. We are losing the legs of the organization there every time we do this.

However we know it's the responsible thing to do and that we are still in this stage of the economy, and that's the signals that have been given here today. We are still in a closing-down, tightening mode. We have not seen the bottom to the point where we believe we are in a holding pattern mode to absorb a lot of operating losses from branches that aren't making money.

So we look at it more on a profitability/cash flow metrics right now than we do -- are we leaving markets or not -- at this stage of the economy. Maybe when things flatten a bit more we will take a little bit longer-term investment view and not close as quickly. But obviously by the numbers we've shared today, we don't see ourselves in that part of the economy yet.

Sounds good. Thanks guys.

(Operator Instructions). Paul Ginocchio, Deutsche Bank.

Just a few comments about some of your competitors that are hurting. Can you talk about if you are picking up -- the number of clients are increasing because of that. Are you picking up clients who have left other firms? Or any way to quantify the impact on you besides the impact on the -- the negative impact on gross margins? Thank you.

You know this is a real mixed bag, Paul. It's a -- you would hope that with competitors failing we would have the opportunity to service these customers, and we've been -- honestly the last three to six months of this economy it's been so shaken that the fall-off has been so fast and so rapid that these smaller branches, they're usually serving one or two significant customers and then a handful or more of good retail accounts that come and go -- there's no consistency to them. And so once that flagship account leaves a branch -- and I'm talking about whether it's our own or whether it's a competitor. When the flagship account or two leave or decline, it destroys that branch.

And in this tough economy, it's hard to find those new flagship accounts. And so without that solid base -- and flagship accounts could account for 50% of a base of a branch. If that base goes, the retail work that comes and goes isn't worth much. It's not worth much to buy, and it's surely -- it's really hard to hunt down, where the competitors -- who they were serving because it's small -- onesie, twosies.

With that said though, the last 30 days we've had more activity with competitors, closing of competitors, movement of competitors, and actually starting to pick up some ability to have insight on who their customers were. So there's a lot of good going on in this area with the moderation of the steepness of the decline. Things are stabilizing and our branches are able to look out now instead of just look at their own bellybuttons and control their own cost structure.

So I think that we are at the point, Paul, you're going to see what you -- your question was about (multiple speakers) [that] it's time. It's time to help consolidate this industry a little bit. I think our branches are up to it.

I guess what are you looking for that would tell you that you have turned the corner? Is it just year-on-year declines, or is it client counts, or is it people out to work? And then also, I think I remember that when you are closing branches, you are really expecting another six to nine months of difficulty. Is that the right way to think about it? So again, you're looking out sort of -- the most recent branch closures would suggest you are thinking another six to nine months of very difficult markets? Thanks.

Yes, that's right. It's not an exact time frame. But -- and it's market by market. So if we close 40 branches, you would have to know exactly where they are. We're looking at the neighborhood and the marketability around that one branch that closes. I wouldn't call that as a signal that the entire United States is turning or not. We run this one branch at a time as if it's our only branch, and we stay focused on that. The -- what was it?

The turn. Was it client counts? Is it number of people out? Is it year-on-year declines?

Yes, the metric that drives our ability to -- what are we looking for? And the bottom line is our Labor Ready branch is the best indicator we have, because there is no -- there's not contracts associated; these companies can take a worker for four hours, four days -- no commitment. And as projects start picking up or business starts picking up, we really believe we will see it first in our Labor Ready branches. That's number-one, and it's just people out the door.

We are hearing a lot of talk about proposals. There is a lot more talk with customers. There is some good signaling from customers. But we need movement. We need people put back to work. So that's the number-one metric right there.

Clint Fendley, [TrueBlue].

Clint Fendley with Davenport here.

A question first though -- and I apologize if I missed it. But be same-store sales comps by month, did you guys provide that?

Yes, that we did, Clint. I mean we provided a summary in the commentary that they went from 30% in January to 35% in March. And we've -- with the 8-K we've filed a variety of detailed information on monthly trends and other items that you can go to and get it.

Okay. Sorry I missed that. And Derrek, I wondered if you -- could you provide maybe an outlook here for the second half of '09? Clearly there's some minimum-wage increases that are scheduled to be phased in beginning later this year. What are your pay rate expectations for how that might increase for the second half of the year?

Yes. We absorbed some minimum-wage increases at the beginning of the year, and so those were really all state-level minimum-wage increases. And then towards the -- in the back half of the year, really at the end of July, the federal minimum wage kicks up. And so that will be an increase in pay rates for our Labor Ready brand. Most all of our pay rates -- the median pay rate is pretty close to minimum wage, so we will be absorbing that and attempting to not just pass through the minimum wage increase but what we can as far as our standard markup on the pay rates.

Thank you. That's helpful. And then finally here with somewhat of a theoretical question recognizing that we are certainly not in any type of recovery and positioning mode for what could be a recovery, but I think in looking back at just your data, I believe [you've] (technical difficulty) closed roughly 230-plus branches since the beginning of 2007 and including what you would plan to do for Q2 of '09. Would that -- knowing the Company and the fact that you've really never opened more than probably 50 branches or so in any given year, which I think has roughly approximated about 5% of your branch base, would that imply that we are five years away if we were to begin to see a recovery as early as a year from now, from building back to where we were?

I thought Steve's flagship account commentary from the prior question was very interesting. Your brand is known. You've got a customer base that is actually in a lot of these towns and in these communities. Is it possible that you could come back in a shorter amount of time than that, that five-year time period? Thank you. Any comments or color?

All right. That's -- you know we were opening 200 offices a year before the last recession. When we came out of the last recession, we set our goals around building larger branches and decided not to over invest. There were a lot of areas of the economy that didn't feel the recession, and quite honestly we saw some of the indicators coming through 2005/2006 that was causing some sort of a bubble, and we chose not to over invest because we didn't know how -- what this is going to look like.

With this recession being as deep as it's been, a lot of cleanup, we will do a new assessment once things settle. And our ability to grow in the next economy, whatever that may look like, will be a fresh start. And our little rule of not opening more than 5% of our base, or only opening 50, and all that cautionary stuff worked during the period of time heading into when we felt a bubble was building. It may not look that way coming out.

But I can't tell you what it will look like, Clint, until we get there. But when we do get there, we will set growth plans, whether it be growing the size of the branch, whether it be taking some of these brands nationwide, or just aggressively increasing the branch count in the brands we own. We will be prepared. We're talking about that now. But don't assume it will look the same as the last -- coming out of the last recession.

Okay. Thank you. That's helpful.

At this time I would like to turn the call back over to Mr. Steve Cooper for closing remarks.

Thank you. We appreciate you taking the time to be with us today, and you can follow-up with any questions that you may have. Thanks.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. And have a great day.