TrueBlue Inc (TBI) 2010 Q3 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's CEO, Steve Cooper and CFO, Derrek Gafford. They will discuss TrueBlue's 2010 third quarter earnings results which were announced today. At this time, I would like to hand the call over to Miss Stacey Burke for the reading of the Safe Harbor. Please go ahead, Miss Burke.

Thank you. Here with me today is TrueBlue CEO and president, Steve Cooper and CFO, Derrek Gafford. They will be discussing TrueBlue's 2010 third quarter earnings results which were announced after market close today. Please note that our press release and the accompanying financial schedules are now available on our website, 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'll now hand this call over to Steve Cooper.

Think you for joining us today to discuss our third-quarter results and our outlook for the fourth quarter 2010. Today we reported net income of $10.2 million or $0.23 cents per share for the third quarter on revenue of $313 million. We're pleased to see double-digit revenue growth for the second straight quarter. We are also encouraged by the increased monthly rate of revenue growth we have experienced during the third quarter. Businesses are increasing their use of temporary workers, and with the signs that we are seeing, we will continue to invest in our sales and customer service programs to capitalize on the growth.

The third quarter was a solid quarter operationally for us. Revenue beat our own estimate, and our operating costs were held in line with a year ago, even with almost $30 million of additional revenue compared to a year earlier. The combination of these two items drove strong operating leverage, and net income per share of $0.23, which was $0.03 above our high-end guidance. The stronger than expected revenue growth during the third quarter was primarily driven by strong same branch revenue growth across most all geographies and industries.

Excluding the impact of our work with Boeing, our largest customer, our same branch revenue grew at approximately 23% during the quarter. Our revenue from Boeing was about $23 million in Q3. And we are expecting Boeing quarterly revenue in Q4 of about $20 million, which is a decline from our peak Boeing revenue of $45 million in Q3 last year. We estimate our quarterly revenue from this account will stabilize around this fourth-quarter estimate. . Over this past year, we have kept you informed of the impact of our work with Boeing. We believe most of the anticipated falloff and special project based revenue from Boeing has occurred and we're pleased with our core operations growing at this time.

Our expectations for the fourth quarter are for revenue to be in the range $295 million to $305 million with net income to be in the range of $0.07 to $0.12 per share. Although the growth and revenue is widespread across most markets and industries, it continues to be particularly strong in manufacturing, where we have seen over a 50% increase in revenue in the past two quarters. Most other industries served, besides construction, grew in the mid- 20% range.

We reported last quarter that although our construction business was not contributing to our strong growth rates, it had shown signs of stabilization. Our residential construction business was essentially flat in Q2 compared to a year-earlier, with commercial construction down approximately 10%. The trends in commercial construction have not changed materially. However, our residential construction business experienced a nice increase of over 10% compared to a year ago. We did see a pickup in Q1 and Q2 in housing permit growth that we believe led to this increase in our residential construction business. I do need to point out, though, that we have seen housing permit growth fall off in the last few months, which doesn't bode well for the residential construction growth to be sustained in the short-term.

Our industrial construction business continues to grow rapidly. We've expanded our ability to serve industrial construction projects by placing electricians, welders, and pipefitters into the building, renovation, and remodel of power facilities and manufacturing facilities. During 2010, we have provided hundreds of skilled workers on plant maintenance and shutdown projects, along with new projects in the windmill and solar energy fields. This is a growing segment for us that continues to be exciting. We remain positive about the opportunities in the blue-collar temporary health sector. Employers reluctant to commit to full-time hiring before seeing concrete signs that our recovery has taken root, are relying more on contingent labor, flexibly employing people as needed. Businesses are turning to flexible staffing to fill a larger percentage of their workforce.

As we have stated in the past, we believe flexible staffing is an important variable for our customers in running their own businesses. We have seen through various economic cycles that our customers use flexible staffing as a method to control costs early in a down cycle. We have also seen throughout time, that once they have stabilized their own cost structures, they turn to flexible staffing quickly and demand can be strong. Currently, we are experiencing the stage of the cycle that demand for temporary workers is growing. It has been projected that the penetration rate of temporary workers to the permanent workforce will increase to even higher levels than the previous peak as a result of businesses looking for methods to remain agile in their business models. We believe we are well-equipped to serve these markets, and customers -- as these customers have been the first to grow following the deep recession.

With our niche approach in the industry, with specialized recruiters and customer service teams, we have shown we understand the unique needs of our customers. We have continued to invest during the downturn in sales and service training, which has increased the quality of our teams and improved our tenure in our employee base that serves these customers' needs. Labor Ready, our largest brand, has historically served small customers. During the recession, small customers were hit the hardest and we saw our small customer sector decline the farthest. We retooled how we serve large customers with a sales and service strategy focused on the different needs larger customers have. That has turned out to be a great strategy as we are stronger in serving that customer sector. And this summer we have seen smaller customers begin to grow again. The small businesses in the United States has historically led growth coming out of recessions.

Due to the nature of this past recession, small businesses were hit the hardest. It's exciting to see growth and demand for workers in small businesses. Labor Ready will now be stronger at serving both types of customers with our new sales and service tools in place to serve larger customers along with our standard procedures and being ready to serve smaller businesses in over 600 communities where we are located.

With strong revenue growth rates, stabilizing gross margins, and operating costs being controlled tightly, we believe the operating leverage in our business model will continue to be strong. At this time, I will turn the call over to Derrek Gafford, our CFO, for further analysis of our operating trends and performance.

As mentioned by Steve, the overriding theme of our results this quarter is strong, widespread, revenue growth. I'll provide supplemental discussion to Steve's comments on our performance starting with revenue.

For clarification purposes, any reference to revenue growth or decline is based on a comparison to the same period a year ago unless stated otherwise. During our conversation today, I will also discuss our revenue growth rates excluding our largest customer, the Boeing Company. While we have experienced signs of stability in our revenue run rate with Boeing this year, in the prior year we experienced large increases. Providing growth rates excluding the Boeing revenue, adds perspective on our quarterly revenue growth trends this year. Total revenue growth for Q3 was 10% and same branch revenue growth was 11%. Boeing revenue for Q3 of $23 million, was slightly above our expectation of about $20 million.

Excluding Boeing, same branch revenue growth for Q3 was 23%. As a reminder, Boeing revenue peaked in Q3 last year at $45 million which is what creates most of the difference in growth rates when Boeing is excluded. Throughout Q3, we experienced accelerating monthly revenue growth trends. September same branch revenue growth was four percentage points higher than in July. Further details can be found in the AK we filed today.

Now, let's focus on future revenue expectations. For the fourth quarter of 2010, we expect total revenue in the range of $295 million to $305 million, which is an increase of about 14%. Keep in mind that our fourth quarter is a 14-week quarter this year versus our standard 13-week quarter. Excluding the additional week of revenue, total revenue growth would be about 10%. Included in our Q4 estimate is the Boeing revenue of about $20 million on a 13-week basis versus Boeing revenue in Q4 last year of $39 million. Excluding Boeing revenue, our expected growth rate on a 13-week basis is about 20%. Our Q4 expected growth rate, excluding Boeing, would be our third consecutive quarter of 20% or better growth despite more challenging prior-year comparables.

Now let's discuss gross margin. Our gross margin for the quarter was 27%, which included about 40 basis points of benefit from HIRE act credits. Our actual gross margin was less than our expectation of 27.4%. The lower-than-expected gross margin was primarily the result of higher workers compensation expense and the impact from large customer work. Q3 gross margin compared to Q3 last year was down 200 basis points due to two factors. First, workers compensation expense was 4% of revenue this quarter compared to 2.9% in Q3 last year. Our work comp rate this quarter of 4% is also what we expect for Q4 this year. Second, the remainder of the decline is due to a combination of increased state unemployment taxes, an increase in the mix of manufacturing, and the impact from large customer work. We expect Q4 gross margin to be about 26.3% to 26.7%, which is a sequential decrease of about 50 basis points from Q3 this year. This is a normal, seasonal decrease in our business.

Now, let's discuss sales, general and administrative expense. SG&A as a percentage of revenue was 20.6%, which was lower than our expectation of 21.5%. The lower SG&A percentage was the result of leveraging our cost structure across a revenue-base that was larger than expected. Operating leverage remained exceptionally strong this quarter as we added nearly $30 million of revenue in comparison with Q3 last year, while keeping our cost structure flat over these two periods. Looking forward to Q4, we expect SG&A as a percentage of revenue to be about 22.5% to 23.5%, which results in about a $4 million sequential increase from Q3 this year. Half of this increase is related to the extra week in Q4. The other half is due to two factors. One, the design of our field incentive programs which pay at proportionally higher levels at the end of the year . I'm missing a page. Sorry about that. I am missing a page, which someone is grabbing for me off of the printer. But, the second reason for the increase from Q3 to Q4 is -- also during Q3 and Q4 -- from Q3 to Q4, we increased our spend on marketing and sales related materials that are both produced and distributed to the branches.

Okay. Let me finish off here. We've talked about SG&A. Let me finish off here with a little bit of discussion about our expectations for Q4 that are remaining. Our tax rate we expect to be 38% to 40% for Q4. We expect a CapEx of about $2 million. And, let's see here, all the way down at the bottom. And we expect depreciation and amortization to be slightly over $4 million. That concludes our prepared remarks. Thanks for bearing with me here as I had a lost page. We'll now open the call for

(Operator Instructions) Your first question comes from the line of Clint Fendley of Davenport. Please proceed.

Good morning, guys. I wondered if you had the same store sales trends information on a month-to-month basis excluding Boeing, just trying to get a feel for the acceleration that you saw on a month-to-month basis.

Yes, we don't provide that, Clint. But what I can tell you is that it didn't make a positive impact. Actually, if we were to exclude Boeing, you would see a slightly more, larger acceleration. But it only makes about a point of additional acceleration, if you're looking at July on a year-over-year basis to September on a year-over-year basis.

Okay. And, I guess just a couple of questions on the cash flow. The Accounts Receivable appeared to be a relatively large use of cash for the quarter, although kind of consistent with year-over-year trends. Any material change in your DSO's?

No, DSO were actually down a bit compared to last year, but I would say that we're getting more in line with where we kind of traditionally are. Last year was exceptionally high, and we pointed out a couple reasons driving that. We're more at a standard level now.

And then, any comment on just the adjustment to workers comp?

The adjustment -- could you ask that a little -- add a little bit more to that, Clint.

Well, it looks like, in looking at the cash flow for the quarter that, that may have helped the quarter a bit from a cash flow perspective and I'm just wondering if there were any adjustments favorably to the workers comp accrual?

Got it. Yes, so what we talked about previously in work comp is, were there any reversals of reserves related to prior periods, and there was. And that amounted to about 90 basis points of revenue.

Okay. And, I guess just the last question here, I wondered, Derrek, could you remind us just the number of branches that you guys have in Canada? And obviously, we've seen some positive trends from that country on industry outlook there.

Yes. Canada's been relatively consistent at about 35 branches here for the last year to two. Trend wise, it's been in growth, but not it's highest that we've seen in some of the other areas across the US.

Okay. Thank you, guys.

Your next question comes from the line of Paul Condra of BMO Capital Markets. Please proceed.

Hello, thanks. Great quarter, guys. I just wanted to ask about the -- on the revenues, you came in well above your guidance. And I wondered, was there anything about the pricing in the quarter that surprised you? Did that come out stronger than expected as well, or is this mostly just all volume?

Really, this is mostly all volume. So we've been getting some price increases (inaudible) through the year. I think across the industry, everybody has had their own challenges for a variety of reasons, but this has been, really been all about volume.

Okay. And on pricing, are you seeing any ability there to raise prices or is it -- I'm wondering how those trends are going in the fourth quarter.

Yes, we've had a good year as far as where we are in the cycle. You see the demand come back first, and I've been impressed and pleased with, especially early -- the first six months of the year, the pricing increases that we got to cover the SUDA increases. It's somewhat stable now in the third quarter. And we project that in the fourth quarter that further price increases this year won't be there. We are very prepared for next year to cover any additional costs that might come on with any further SUDA increases. The lessons learned in 2010 will definitely be applied to 2011. But, as Derrek mentioned, it's not an environment where pricing is driving revenue growth, but it is covering cost increases or at least a portion thereof maybe not getting the full gross margin. It's been a pretty good year given where we are in the cycle.

That's great. Last year at this time the SUDA taxes were really in the headlines a lot. I'm wondering are you hearing -- for 2011, are you thinking more stability in that tax level? Are state's still talking about increasing them or maybe even decreasing them again? Any color on that?

Yes, we're in the middle of those discussions right now with our outside consultants that work with us on this. I got to be honest with you, Paul, I really don't have any color to add on that. That will be something that we'll be able to comment on more when we get around -- further through the year. The states just haven't all prepared their models. We're right in the middle of it as we speak.

Okay. That's great. Lastly, just on the workers comp, what is driving the increase there? You said it was up to 4% this quarter.

The reversal that we had, related to prior year reserves was lower than what we have had historically received.

Okay, and squeeze one more in. What's your share count assumption for the fourth quarter?

It usually runs up about, if we're talking about on a quarterly basis, somewhere around 100,000 to 150,000 a quarter. That's a pretty safe assumption.

Okay, great. Thank you very much.

Your next question comes from the line of David Whitley of Bank of America. Please proceed.

Sure, I'm just thinking about gross margins next year. Can you give the full year gross margin benefit from the HIRE act?

For 2011?

For 2010, does it repeat in 2011?

I can give it to you in basis points. I think it comes out to about a $1.5 million, but you need to check this. In Q3, it was 40 basis points of revenue, and in Q2 it was a little under 10 basis points. It has not been extended yet for 2011.

Right. Right. And then if small and medium-size customer demand starts to increase here, would you still be expecting negative mixed shift in terms of gross margins next year?

Well, if it increases like it did in Q3, we might find a good balance, especially since a lot of the growth that took off in large manufacturing accounts was in Q3, Q4 and Q1. So we're going to come up against the period of time where that mixed shift was happening rapidly. I believe we'll see gross margin stabilization with the small business growing and the larger accounts stabilizing.

Okay, maybe if I could squeeze one more in. Is this it for office closings, or you still planning to close a few more offices in the fourth quarter?

Well, that's a tough question. We're always looking at each market trying to be in the most favorable places at the right time, even through the history of this organization, we've had office closings even in good times. For 2010, we most likely have another three to five closings that will happen in the fourth quarter. Beyond that, we don't see any, but we've always had, traditionally, have had a few here and there. That's kind of our plans going forward.

Okay. Thank you very much.

(Operator Instructions) Your next question comes from the line of Otto Garrett of Deutsche Bank. Please proceed.

Hi. Good afternoon, I was wondering if you could provide a little bit more color around the change in gross margin. We saw that the compression slowed down a little bit this quarter. But we are looking for a little bit more of a compression there -- or deceleration in the compression. Could you provide some additional color around that?

You'll have to -- maybe you could ask me that a little bit more directly when you are talking compression. Are you talking about --

I was just wanting to get a sense -- looking at the reasons for the slowdown in the compression of gross margins, just seeing what you could provide around some of the factors that cause that change.

Yes, I think the biggest thing that we talked about today was work comp when we came it at 4%. That was 30 basis points compared to Q2. If you're talking about it on a sequential basis. We have some pricing related to a couple large customers that kicked in as well. Those two factors -- they had us come in a little bit lower on our gross margin than we expected.

Okay, great. Thank you. And, looking at the office closures, I was wondering, can you give me some insight around how that factors into the SG&A expense?

The closing expense isn't that high. It is under $100,000 of closing expense for those offices that were closed. Then on an ongoing basis, the average SG&A on any given branch is under $200,000 a year, so $50,000 a quarter going forward you could take out of cost.

Okay. Let's see. Finally, I was wondering can you give some more color around some of the changes that you saw in manufacturing? You mentioned that it was up a few percent over the last two quarters. Can you provide any more color on that, on the performance of manufacturing?

Well, it surged greatly in the Midwest and then somewhat in the Southeast a year ago. We saw strong results in Q4 and Q1, but then they jumped from 20%, 30% growth up to 50% growth in Q2 and Q3. As far as end markets that they're serving, it's across food accounts, serving the auto industries, and just general manufacturing accounts, mainly in the Midwest. is where that's coming from.

Our Spartan brand has grown really nicely this year. They have a methodology of serving these larger accounts and adding full shifts, adding large chunks of people. That's where a lot of that initial growth came. The addition that I added my comments today were, well we've started to see -- the onesies, twosies where customers are taking two workers and four workers, and that's exciting for us. The initial growth came off of adding 20 workers and 40 workers at a time, which was fun, because it came in big chunks.

But our real bread-and-butter, historically, has been knowing how to serve a lot of accounts in a lot of markets, the combination of the two together is going to be powerful. We're able to serve larger accounts, and we see our onesie-twosie business growing now.

Okay, great. Thank you.

Your next question comes from the line of Mark Marcon of RW Baird. Please proceed.

Good afternoon, and congratulations on the strong results.

Thanks, Mark.

I was wondering if you could talk a little bit more about Boeing in terms of -- what do you -- what's the nature of the discussions now? Just a little more color there. It sounds like things are stabilizing, and they actually came in a little bit ahead of expectations here for the third quarter. Just trying to think longer term, particularly, they've been in the news a little bit. Just a little bit more color there?

Yes, we're still serving them in the same place where they were building the dream liner, and they really ramped up that work and got the project back on pace a couple years ago. We were there to help them fill that plan, meet those project needs, but it was very project basis. We knew that going forward. However, that has shifted a bit and we now have a piece of the permanent business on a going forward basis, and that's why we project in this $20 million range of business, because it's somewhat stable now.

However, we've done such a great job on serving projects, they do have projects, come up here and there. And our team is current on the needs and our availability and where they have needs, whether that be on doing warranty work, partner work, or a new idea popping up. Anything that's running above $20 million and maybe even slightly below that, you know, the $3 million to $5 million of project work popped up, and we believe that's a benefit to us, and that comes at a little bit higher margin. It's good work.

But the good stable base business is still in that -- where we now have a long-term opportunity to do $60 million, $70 million of long-term work there in that plant. It's not going to run the rates it did a year ago. That was a great project that our team worked on, and we're pleased with their work. Our service level of Boeing remains high. Our relationship remains high, and our ability to partner with them on things as they come, I believe we'll be one of the first vendors they turn to.

Great. Can you give a little more color around the various brands? I know that the strength with the exception of commercial construction, it's been fairly widespread, but I was wondering if you could talk a little bit more about, what are you seeing in core Labor Ready? What are you seeing in -- you did mention Spartan, but what are you seeing in PlaneTechs ex-Boeing, what are you seeing CLP, et cetera?

Yes. Since Labor Ready is our largest, that's the one that I spent the most time talking about today. Being 60% plus of our topline and a big driver of our bottom line, the exciting part there is that we did get a pickup in residential construction this summer and it was somewhat of a shock to us to see that happen, but it did correlate with housing permit growth. And that housing permit growth has jumped around a bit.

I had made the comment, we don't see in the short-term that this residential number can hold up with the housing permit number bouncing around like it is. There's still a lot of uncertainty around residential construction, but the nice part, is businesses are still turning back to us when they have growth. Those that are building homes and when they have the opportunity to do that kind of work, that we're still that first choice. So we're excited about the future of residential construction. It's just going to be very uncertain for a while.

In the meantime, we've built so many more capabilities at Labor Ready. We're serving larger accounts, being in the manufacturing, the distribution business, the services businesses. The accounts that we service through our what we call national accounts center where they get a little more hand holding, that business has grown the last two years whereas the small business was still falling off. It really held our result up strong in 2009, the large businesses, and in 2010 it's been somewhat stable and continuing to grow. Now we are serving the onesie twosie business like we always did at Labor Ready, and it's getting to be a lot of fun there in that area.

Over at Spartan, we've talked about that a bit, but they serve high manufacturing business and distribution. A lot of it in the food business and the auto business. And both of those end markets are growing nicely.

Over at CLP, it's held strong. Somewhat supplemented by the new areas of business and industrial construction that they have gotten into. So the additional falloff in residential or further falloff in commercial has been supplemented by their industrial construction. They held a great number. They put up good income growth this year, and that team, we're real excited about it. We do know that those 50 plus branches will see the growth when this new housing permit number takes off, which will be followed by commercial growth, commercial construction growth. So fighting through this last two or three years at the CLP level is a win for us. We still have roots in the ground and in the right markets and the right place.

Our truck driver business, Centerline, is exciting. It's a small business that we bought in California. We've now expanded to be in multiple states. That business is growing 20% plus, and we're doing it all organically. We are putting salespeople out in Labor Ready offices, so we don't have to add a new lease. We don't have to add new cost to the system except the salespeople. It's all serviced centrally out of California still, as far as servicing the customer, dispatching the truck drivers, and doing all the testing and the compliance work is done on a central basis to keep costs low. That business is growing nicely also.

The one struggle is over at PlaneTechs, because the Boeing business was such a large piece of that organization. However, they are moving quickly on taking their resume that we have built to other manufacturers in the aircraft business. The MRO business, which was their core business, where it's the maintenance repair and overhaul business of aircraft, that business has been down the last two years. However, we've seen somewhat of a turn and we're hearing our customers starting to rebuild their businesses in that MRO space. Aircrafts -- the number of flights are increasing, the number of -- the scheduling is increasing. For those of us that travel, it might not feel like it, but the projections are that, that business is going to grow and there is going to be more flights available, which is only going to start moving the aircraft out of storage, needing to be repaired and put back in air. The projections there are fairly strong.

Across the board, you can see that almost all areas of our business are growing. Again, the commercial and residential construction is an area of concern. But we've reduced our cost to a level that they're being covered. We will be the first, and we will be the leader in that construction growth as it takes off. So, that's a pretty good overview for you there, Mark.

That's great. I really appreciate it, Steve. Can you talk a little bit about the excess capacity particularly in the Labor Ready branches and also, what are the implications for the onesie, twosies picking up? Doesn't -- wouldn't that mean that maybe the gross margin spread might be a little bit better?

We hope for that, Mark. You know, that's what we are seeing. That business can be priced a little more aggressively. Historically, it's been stronger margins, so you're right on point there. The cost structure of the Labor Ready branch was reduced significantly throughout the brand. The number of employees per branch was reduced to below three. We've held it down there even with the pickup and revenue of 20% plus over the last few quarters. We're still holding those headcounts strong.

There is still some capacity. The branches were busy during this busy season of August, September. I really believe that during Q4 and Q1 we're going to be able to hold strong, and we'll take a peek at demand when we get to Q2 of whether the cost structure will have to come up slightly. But it will only come up in relation to business growing.

Derrek has given this percentage of 6% to 7% is the SG&A expansion to every revenue dollar. That includes adding new headcount, adding hours to the branch as it expands. That model will hold pretty strong. We believe that 2011 we can hold to that model.

Great. Thank you very much.

(Operator Instructions)

With no more questions at this time, we will go ahead and finish up the call. We appreciate your time on the call today and your interest in the organization. It is an exciting time for temporary help, and it is a real exciting time for TrueBlue and our service engines that we've built. We thank you for your time, and we'll update you as we go forward.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect. Have a great day.