TrueBlue Inc (TBI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to TrueBlue's conference call. Today's call is being recorded. Joining us is TrueBlue's CEO Steve Cooper, and CFO Derrek Gafford. They will discuss TrueBlue's 2011 first-quarter earnings results, which were announced today. 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's CEO and President Steve Cooper, and CFO Derrek Gafford. They will be discussing TrueBlue's 2011 Q1 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 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. A reconciliation of any non-GAAP measures discussed today can be found in the Investor section of our website. 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 Commissions including our most recent forms 10-Q and 10K. I'll now hand this call over to Steve Cooper.

Thank you, Stacey. Good afternoon and welcome to the first quarter 2011 conference call. Thank you for joining us today to discuss our first quarter results and our outlook for the second quarter of 2011. Today we reported first quarter revenue of $274 million, an increase of 14%, and net income of almost $1 million, or $0.02 per share compared to the $0.05 loss a year ago. We produced approximately $5 million in EBITDA compared to our earlier estimate for Q1 of $0, so clearly the additional $10 million of revenue generated in Q1 resulted in greater-than-expected EBITDA.

The momentum that we established in 2010 continued into the first quarter. In most geographies and lines of business outside of aviation and residential construction, we continue to see strong revenue growth. We have executed extremely well in 2011 so far, and we continue to be optimistic about what we will achieve in 2011. After Derrek goes through further operational and financial details, I'll cover more about our momentum and our approach to the market. Derrek?

Thanks, Steve. I'll start off with some high-level comments on our first quarter results and our expectations for the second quarter of this year. Then we'll cover the operating trends for Q1 and key assumptions for Q2, followed by some thoughts on our future EBITDA margin. Diluted earnings of $0.02 a share for the first quarter was above our estimated range of a loss of $0.05 to $0.00 a share. This out-performance was primarily the result of revenue coming in nearly $10 million above the midpoint of our expectation. Producing total revenue growth of 14%. We are pleased with the nearly 15% incremental EBITDA margin in Q1.

For Q2 this year, we expect total revenue of $315 million to $325 million, which is revenue growth of about 12%. We expect net income per diluted share of $0.15 to $0.20 per share, which is about the same as Q2 last year of $0.18. Q2 net income this year will not have the traditional amount of growth due to a year-over-year gross margin decline that will taper off this year, timing differences in SG&A, and an income tax expense windfall in Q2 of last year.

Let's review some of the key operating results for Q1 this year. Any reference to our performance is based on a comparison to the same period a year ago unless stated otherwise. The strong Q1 revenue performance was driven by widespread demand across the business. We experienced revenue growth in 18 of our top 20 states, as well as the mass majority of industry groups we serve. Starting this quarter we are exclusively reporting our revenue trends on a total revenue basis consistent with the industry versus our prior practice of also reporting same-branch revenue trends. Total revenue trends and same-branch revenue trends have become virtually the same due to the insignificant impact of branches opened and closed in the last 12 months.

Our monthly total revenue trends were as follows. January was 19% growth, February was 12%, and March was 13%. January's revenue growth of 19% was favorably impacted by the 53-week year in 2010 which created a later-than-normal start date for fiscal year 2011. This resulted in the week after Christmas, our slowest week of the year, being excluded from January 2011, but included in January 2010. January's revenue growth, normalized for this timing difference, was 11%. Our gross margin for the quarter was 25.5%, which was at the high point of our expectation and equal to Q1 last year. SG&A as a percentage of revenue was 23.8%, which was lower than our midpoint expectation of about 24.5%. The lower-than-expected SG&A percentage was the result of higher-than-expected revenue leveraged across our cost structure.

Let's finish Q1 with a couple of cash flow and balance sheet items. Cash flow from operations was a $5 million use of cash versus a $3 million source of cash, Q1 last year. The drop in cash flow from operations was due to the strong revenue growth in Q1 this year and the associated increase in accounts receivable. Day sales and accounts receivable increased by about a half-a-day in comparison with Q1 last year. However, the aging of accounts remain consistent with Q1 last year.

Now let's take a deeper dive into some of the key factors impacting Q2 profitability. We expect gross margin for Q2 to be about 25.7% to 26.2%, which is lower than Q2 of last year of 26.6%. About half of the decline is due to our expectation for work comp as a percentage of revenue in future quarters to be about 4% versus 3.7% in Q2 last year. The other half of the decline is due to a continued increase in the mix of manufacturing and large customer business. SG&A as a percentage of revenue should be about 20.5% to 21.5%, which equals about a $2 million to $3 million sequential step-up from Q1 this year, which is a normal seasonal build for us, excluding recessionary periods. Keep in mind that Q2 last year was the first time we experienced double-digit revenue growth since Q1 of 2008. The speed of the revenue ramp in Q2 last year created a lag in the variable SG&A to support the continued revenue growth, as evidenced by the consistent amount in SG&A dollars in Q1 and Q2 of last year, which is impacting our Q2 2011 comparison. Lastly we experienced $1.3 million, or $0.03 per share of non-recurring income tax benefit in Q2 of last year.

Let's cover a few remaining expectations for Q2 2011. We expect depreciation and amortization to be about $4 million. We expect about $2 million of CapEx, and our effective income tax rate should be about 38% to 40%. While the gross margin and SG&A items I mentioned in the discussion of Q2 expectations will impact our performance is the short-term, our business model is still capable of producing incremental EBITDA of 15% to 18% of revenue.

On last quarter's call we discussed that our EBITDA margin should reach at least 7% during this economic cycle, and that has not changed. It is important to note that this EBITDA margin assumption is based on our current mix of business. Small customers and construction are our highest gross margin markets, and both remain at historic lows for us. With a mix of business similar to the last cycle, EBITDA margin could return to a similar level. As a point of reference, EBITDA is calculated by excluding interest, taxes, depreciation and amortization from net income, as shown in our Q1 investor presentation posted on our website. I'll now turn the call back to Steve.

Thank you, Derrek As I mentioned earlier, we are confident that the top line momentum will continue. The difference in comparability that Derrek has explained for the second quarter has no bearing on the quality of operations and results we are producing. We just need to work through some of these items that are causing the lack of comparability, and if understood properly, you will see the momentum and the longer-term operational leverage in our business should continue. We will continue to see expanding profit margins as we produce more revenue. During 2010 our operating income margins expanded to 2.5% from 1.2% in 2009. We are encouraged with our momentum and when you take into account the non-comparable items in Q2, our opportunity to continue to expand our profit margins in 2011 by approximately an additional percentage point to nearly 3.5%, you can see the leverage remains in our business.

I'm extremely proud of the team with the continued momentum and driving revenue growth. I'm constantly impressed with the caliber of people at every level of our Company, and we are committed to investing in their continued development. During the recession, we cut nearly $100 million of SG&A out of our business. I'm proud to say that during that same time we increased our level of spending in sales, service, and leadership training. Over the last three years we have trained and conducted follow-up training and accountability broadly across our organization. We've also invested in new professionals in many areas that are focused on building sales and service strategies with an industry-by-industry focus. The increased industry focus, along with additional training, accountability, and new professionals, continues to be the driving force behind our current results.

Business are turning to flexible staffing to fill a larger percentage of their work force. We are seeing this across most all segments of industries and customer size. As we have stated in the past, we believe flexible staffing is an important variable for our customers in running their own businesses, and this is a growing trend that could continue. We believe we are well-equipped to serve a broad spectrum of markets and customers with our strategy focused on bringing the right skills to each customer through a specialized approach with specific industry expertise. Our niche approach in the industry, having specialized recruiters and customer service teams, we have shown we understand the unique needs of our customers.

We have historically served small customers. During the latest recession, small customers were hit the hardest and we saw our small customer sector decline the farthest. We retooled how we serve larger 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 now stronger in serving larger customers. And we are also now seeing smaller customers begin to grow and use flexible staffing once again. We will now be stronger at serving all sizes of customers with our new sales and service programs in place to serve the larger customers, along with our well-established ability to serve smaller businesses in over 700 markets where we have recruiters and sales teams located. At this time, we will open up the call for questions you may have.

Clint Fendley from Davenport.

Thank you, good morning, guys. Or good afternoon. I wondered if you could talk a little bit about what you are seeing on the commercial construction side, and any levels of activity there that could indicate that things might be improving at all?

Well, Clint, they held pretty close to the fourth quarter, and when we mentioned in our fourth quarter results that we'd even seen some residential bounce-back at that point in time, that was a bit of head fake, and the residential portion did not continue into the first quarter . It didn't shrink, but it kind of fell back and held at a consistent rate, whereas commercial construction continued to go forward about at the same rates that we talked about in Q4, so we're excited and look forward to that trend to

Are there any leading indicators that you look to for the construction part of your business, maybe the ABI indexes, that seem to be moving in positive directions the give you hope that you might get back to be EBITDA margins that you had seen in prior cycles?

Well, it is pretty tough because there have been quite a few head fakes the last 12 months in the area of construction, and we've seen it go forward a bit then come back then go forward. And for the most part, our business is driven by residential construction permits, and that's been the big driver behind commercial. With residential down for so long we have sought other avenues to grow commercial construction, and it's not as much based on new residential. As you can see the trend of the past, when there's a new neighborhood built, there was need of new shopping malls and roads and localized commercial construction. The bulk of what we are doing now is very much remodel. So it's hard to forecast, it's hard to see out there what might be coming next in the area of forecasting commercial remodels. But that's a little bit shift there, Clint, not a great answer to grab hold of a forecasting item, but it's a different swing. But still we're pleased with our internal results in the commercial area.

Okay, great. Thank you, guys.

Sara Gubins from Bank of America Merrill Lynch

Hi, thanks. Good afternoon. Could you talk about bill rate trends and maybe how that varies for larger versus smaller clients? And also how you're business now breaks down between larger versus smaller clients.

Sure. We don't get into an average bill rate discussion, Sara, just because of the different brands we've got, there's a lot of mix difference, particularly with our PlaneTechs brand that could swing things around. In general we've been getting good bill rate increases to cover the costs of unemployment taxes and those increases that went through at the beginning of the year. When it comes to small customers and large customers, we generally break that down based on spend levels, and our very smallest customers are running about 10% or 15% less in our mix than they did prior to the recession.

Okay. And any comments on gross margin trends during the rest of the year?

Well, I -- the difference that we talked about for Q2 on the year-over-year decline, half of that being work comp, that's going to negate itself because we'll be close to this 4% run rate on a go-forward basis, and that's comparable to the work comp rate in future quarters, so that piece will drop off. The large customer and manufacturing mix that has had an impact will start to taper itself off as we move through the year, as well. The only thing to watch for is there is some higher credits in Q3 and Q4 of last year, but other than that I think things should tail off and level off on comparability basis.

Okay, great. And then just last quick question, can you tell us what Boeing revenue was in the quarter?

Yes, it was about $23 million.

Okay, thanks a lot.

Jeff Silber from BMO Capital Markets.

Thanks so much. Just focusing again on gross margins, were there any reversals of prior worker comp accruals in the quarter?

Hi, Jeff. Yes, there were. Let me give that to you. So the work comp reserve reversal equated to about 120 basis points of revenue in Q1 this year.

If I remember correctly, that's fairly consistent to what it has been running recently, is that correct?

Yes, that's pretty close. It's varied a little bit just because of the revenue differences we have seasonally, but from a dollar-perspective it's pretty close.

Okay. In terms of the revenue guidance that you gave for the current quarter, does that just assume that the current run rate roughly stays stable in terms of year-over-year growth?

We don't necessarily do it just on a percentage-of-growth basis, but we take the run rate that we've got and run it out based on our normal seasonality trends. Our Labor Ready brand has been doing better so we are expecting a little bit more of a step-up, which we had in Q1 this year, as well, but we're expecting the trajectory of that step up to continue into Q2.

Is there any noise from Easter falling in April this year versus March last year?

No. We don't have any big noise from that perspective, because I believe Easter was actually in April last year.

Was it? Okay. My bad, I'm sorry about that. And then just a couple quick numbers questions. Can you tell was the stock-based compensation was in the quarter?

Sure. It was about $2.6 million.

Great. And then the guidance for the second quarter, what share count should we be using?

Oh I think if you bump it up by about 100,000, the weighted average that was here in Q1, for Q2 move it up 100,000, you'll be pretty close.

Okay, great. And then finally in terms of your budget for capital spending for this year?

We haven't given anything for the year, but $2 million for next quarter is what we're expecting, and I wouldn't expect that run rate or that quarterly expectation to dramatically change the rest of the year.

Okay, great. I appreciate the color, Derrek. Thanks.

Jim Janesky from Avondale Partners

Good afternoon, Derrek and Steve.

Hi, Jim.

Question, Derrek, you went through in detail what the year-over-year changes were going to be in profitability and how that was going to breakdown between gross profit and SG&A and the reasons behind it. My question for you is can you explain the incremental changes versus what you reported when you reported your fourth quarter -- what you discussed, I should say, when you reported your fourth quarter? Is there an incremental change in the positive or negative direction to the expectations for gross profit or SG&A?

Well, from a gross profit -- gross margin perspective it gets a little tough to talk about is it sequentially just because how our gross margin changes as we move through the year, both because of mix and because of temporary workers hitting their payroll tax thresholds, taxable base thresholds. I think the important thing that I would point out from Q4 from an SG&A perspective moving into Q1, and if you're using that as a basis for any other quarters, is that Q4 was a 14- week quarter versus our normal 13-week, so there is about $2 million or $3 million of extra SG&A dollars in Q4 because of that extra week.

Okay. So other than mix, would you say there is any incremental pricing pressure especially among larger customers? There was a major player in the space today who had talked about, we are staying away from these quote large customers because the pricing and the margins are just ridiculous, so we're walking away from it. Are you experiencing any of that? Can you define what you -- what falls into a small versus a large customer?

Well it is way different than some other of the larger players that you're speaking to. Large to us, remember our historical value was running localized labor offices, and as we look beyond that, so a large customer to us is not even a small customer for some. But that's a generalized statement, we don't give the cut-offs of what we call large versus small, but in general terms to our history is what we're referencing to. The question about the pricing pressure, it's a bit of a mixed bag, Jim. It's not a free-for-all for everybody to go raise prices to all they want, but I can tell this, the customers are more willing to talk. They understand the cost components better than they might have at the beginning of 2010 related to unemployment cost. So the conversations aren't as tough, but that doesn't mean that we have two hands on the steering will and the customer doesn't have any. It's not quite that easy.

So your earlier question of saying what has changed between our beginning-of-the year expectations were coming out of the fourth quarter and what we might see now is that our gross margins aren't expanding as fast, but as Derrek mentioned earlier, our mix of what we call large customers has shifted slightly and it's producing more revenue growth. So we're excited about that, but this isn't us chasing a lot of large accounts that aren't paying 10% or 12%, we're still getting very nice margins in this business.

Our big fall-down is that the small business that relies heavily on the quick fill, and the construction customer that relies heavily on the changing needs and just higher labor and higher costs, we are missing out on those margin opportunities right now. The overall other margins in our business, for any size of business, aren't that far out of line of historical values. We just don't have the business mix that we used to have. And so we're taking that into account as we build new strategies and we try to understand our cost structure so we can deliver a value to the bottom line, but it's part of a changing strategy. You can't change it overnight nor do you want to.

Derrek also mentioned that when these return, the small business and the construction business, we want to be prepared there. So we can't -- we're not going to walk away from our ability to serve small business and construction business, but we have to always challenge ourselves at what cost? What cost today? Are we hanging onto methods to serve business that will return someday? And it's definitely in our conversations of portfolio mix. So it's a big answer to a big question you asked, but it's -- we're on top of it and it remains one of our highest areas of conversation day in and day from the top of this Company right down to the salesperson making the next sale.

Okay, thank you.

Paul Ginocchio from Deutsche Bank. Mark Marcon from RW Baird.

Good afternoon, guys.

Hi, Mark. Can you talk a little bit about the incremental SG&A that we should end up seeing invested in Q2 relative to Q1? Where is that going and how should we think about office openings and things of that nature as the year unfolds?

Yes, as far as variable SG&A of for Q2, using our standard percentage of say 8% to 11% of SG&A based on incremental additions to revenue, you would expect maybe about $4 million or so of variable SG&A to roll on. Taking the midpoint of our guidance and the SG&A percentage that I talked about for Q2, that's probably going to be closer to $6 million on a year-over-year basis. And that additional $2 million, a large part of that is based on what happened in Q2 last year. In Q2 last year, although we grew at double-digit revenue -- a rate of double-digit revenue, the SG&A just didn't build from Q1 to Q2, it lagged. So that prior-year comp was a little bit low last year compared to what we would normally expect.

What are you going to spend it on?

That variable SG&A fills out through a variety of items, a little bit of additional headcount on a [FTA] basis. Not a lot of new heads, but maybe about one-tenth of a headcount, two-tenths of a headcount addition. When the new revenue comes on there's more bonus expense. That's good bonus expense as long as we are growing. And then we've got a variety of other variable SG&A costs to service customers that come on what that revenue.

Great. And then do you think the workers comp is going to stay at 4% as a percentage of revs?

I think so, Mark, that's what we're seeing right now for Q2 and that's our best estimate going forward? Accident trends have been pretty stable and we've been controlling claim costs very nicely, so I think that 4% rate is our best estimate of the go-forward run rate in work comp as a percentage of revenue.

Great. And then what are you hearing out of Boeing? Are we still in a fairly good spot in terms of revenue continuing at these levels or have there been any changes that you are aware of?

Not any big changes, Mark. Our revenue guidance for Q2 has got about the same amount of revenue that we've got in for this quarter. We talk with Boeing consistently and talk with them in-depth before the start of each quarter and no big changes on the horizon.

Great. What are you seeing out of CLP?

CLP has been doing quite nicely actually. Steve talked about where the construction growth has been coming and CLP has been growing at a nice clip. One on the commercial -- or nonresidential side from a lot of retail remodels, so retailers remodeling, as well as nice growth on residential remodels, but more on high-end home side.

Great. I'll jump back in the queue, and nice job.

Paul Ginocchio from Deutsche Bank.

Sorry about that before. The 3.5% EBIT margin I think that you talked about, Steve, in your prepared remarks, what was the revenue assumption roughly that gets you there?

Continued trends, how about that? We don't give revenue guidance beyond Q2, so that's just the continued momentum that we're where we are.

So what prompted you to give an EBIT margin target?

To show that Q2 is an anomaly, that the year as a whole is going to come together very nicely, but it's all words unless we put some stake in the ground for you to show that we are living up to it. So we see the year coming together quite nicely for us, and I just wanted to be very clear about that, Paul

Great. You talked about construction growing high-teens last quarter with the extra week. I just wondered what it looked like in the first quarter, all in?

It was all in for this quarter, commercial was -- or construction overall was running about the same, Paul, about mid-teens

Great. And just final one, can you talk about how the HIRE Act over the next three quarters, which is there a quarter that is a third or fourth -- a third quarter that's going to be a pretty tough comp because of that?

The third quarter of last year had about 40 basis points of benefit to gross margin from HIRE Act, and Q4 had a net all in of about 20 basis points.

And what was the second quarter?

Second quarter of last year?

Yes, please.

It was almost nonexistent.

Thanks very much.

(Operator Instructions) Kevin Mcveigh from Macquarie.

Great, thanks. Hey, Derrek, could you tell us where the office count stood at the end of the quarter -- number of branches, rather?

Hi, Kevin. Sure. Total number of branches was 719.

719, great. And then can you just -- and I know you talked about this a little bit directly, give us a sense of how the business is going to trend in terms of small to medium businesses versus larger clients as we think about the next couple of years versus where it's been historically?

Well it's -- I mean we don't have a perfect crystal ball, Kevin, on where that's going to go. Our focus is certainly on building back that small customer business. What we do know is, other than the stats we've given you on where our business mix sits for construction of small business is what the macro picture has for those two. New home construction is at an all-time low of under 300,000 units . Construction employment is about 80% of the median of it's -- or 60-year median. So both of those are quite suppressed, and small customers have yet to really bounce back in any force. We've seen some pick-up there, but not a significant change in the mix

Got it. And then, Derrek, one thing, I wonder, can you just help us understand, obviously Boeing had run-off a little bit relative to Q1 last year, and you were able to absorb that in the margin or was there a margin impact, as well? Because it looks like you framed out the workers comp and the mix issue in terms of some of the margin compression, but was there any impact in the Boeing, the run-off in the Boeing contract at all?

There is some. One, there is a drop in our revenue with Boeing, which if the margin on that account had stayed the same, would actually give some lift to gross margin, because it's a little bit lower gross margin than our blended average. But at the same time, we've made some pricing changes with Boeing, and that margin is lower than it was a year ago. So the two are pretty close to washing themselves out and not having a big impact on the blended margin for the Company.

Super. Thank you.

Sara Gubins from Bank of America Merrill Lynch.

Hi, thanks for letting me follow-up. I'm trying to understand a bit more about the operating margin forecast for the year, and I'm wondering if your incremental margin target of 15% to 18% for 2011 still applies?

Well, the business model itself long-term we think is going to produce that. It's going to be challenging to make 15% to 18% for the entire year based on where Q2 is going to be coming in that we've talked about. So we won't be getting the 15% incremental EBITDA in Q2 this year because of some of the items we've mentioned, and that's going to have an impact on the blend for the entire year.

Okay. Got it. Thank you.

And we have no further questions at this time. I'd now like to turn the call back over to Steve Cooper for closing remarks.

Yes, thank you for your questions today and your continued interest in the organization. We'll update you as we go forward. Thank you.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.