TrueBlue Inc (TBI) 2012 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's CEO, Steve Cooper, and CFO, Derrek Gafford. They will discuss TrueBlue's 2012 first quarter earnings result 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.

Thank you. Here with me today is TrueBlue CEO and President, Steve Cooper, and CFO, Derrek Gafford. They will be discussing TrueBlue's 2012 Q1 earnings result which were announced after market closed 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 measure 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 Commission including our most recent forms 10-Q and 10-K.

I'll now hand this call over to Steve Cooper.

Thank you, Stacey. Welcome everyone. Today we reported 2012 first quarter revenue grew to 13% to $311 million. Which produced $0.04 per share of net income which is in line with earlier guidance.

Our operating margins expanded by 50 basis points compared to prior year first quarter. We expanded our operating margins by growing revenue 13% , while holding gross margins consistent and running an efficient cost structure. Expanding our operating margin remains a high priority for our team. As we continue to grow revenue we are focused on being diligent and appropriately pricing our business to get the highest possible gross margin at the highest possible revenue growth. This requires to balances opportunities for growth with our focus to increase our profitability.

As we have expanded our opportunities with larger accounts over the past years, our total mix of gross margins has been lowered. To offset the lower mix of gross margins, we have been and remained diligent in lowering our cost structure. We have successfully lowered selling and administrative costs as a percentage of revenue during the same time period our gross margin mix has changed. As a result, we have expanded our operating margins. We remain focused and committed to driving operating leverage in our future results.

Revenue continues to show strong growth as gross margins remain stable in 2012. In Q1, we grew revenue across almost every industry group and geographic region. Residential construction remains a challenge; however, we are continuing to see commercial projects and energy related construction projects show strong growth. We remain focused on our approach to build an expertise in several industry vertical markets along with driving our local market selling and delivery services. This multi prong approach is building national and regional customer relationships along with our strong capability of serving local customers is the driving force behind our strong results.

The one vertical market that I just mentioned that is continuing to show extraordinary revenue results is clean energy. Similar to Q3 and Q4, this sector positively impacted our overall growth in Q1. We feel comfortable with our ability to sustain revenue growth from this sector throughout 2012. After Derrek reviews further operational and financial details, I will offer some additional

Thanks, Steve. I'll start off today by covering our high level first quarter results and expectations for the second quarter of 2012. Then we will take a deeper dive and cover the key financial trends for Q1, the assumptions behind our Q2 estimates, and finish off with a discussion of our balance sheet and cash flows. Any reference to our performance is based on the comparison to the same period a year ago unless stated otherwise.

Solid execution across the business produced strong results this quarter. We experienced consistent monthly revenue growth resulting in total revenue growth for the quarter of 13%, which was at the high end of our expectation. Diluted net income of $0.04 was also near the high end of our expectation and was doubled the results in the same quarter last year. Looking forward to Q2 2012, we expect total revenue of $350 million to $360 million representing growth of about 11%. We expect diluted net income per share of $0.22 to $0.27, which equals growth of about 25%.

Now let's review some of the key financial trends in our Q1 result. Gross margin for the quarter of 25.5% was at the high end of our expectation and equivalent to Q1 last year. Q1 last year included our last receipt of HIRE Act Credits, which impacted the comparability of our gross margin as well as our overall profitability. Excluding the HIRE Act Credits from Q1 2011, gross margin would have increased by about 40 basis points this quarter. This pro forma gross margin improvement is a great start for us considering the higher cost of services in our gross margin from both unemployment tax and minimum wage increases that went into effect at the beginning of this year. The pricing of our business continues to be a key area of focus and our teams are executing very well in this area.

Now let's discuss sales, general and administrative expense. This quarter's revenue growths spread across our largely fixed cost structure continued to deliver operating leverage. SG&A as a percentage of revenue was 23.2% as expected. In comparison with Q1 last year, our operating leverage produced a 60 basis point decrease in SG&A, and similar increase in operating margin.

We continue to take a balanced approach by managing expenses, but also investing for growth. On a dollar basis SG&A increased about $7 million compared to Q1 last year. Mostly due to the variable SG&A expense associated with the nearly $40 million increase in revenue. Our effective income tax rate of 42% was also in line with our expectation, but higher than Q1 last year, due to the expiration of the Worker Opportunity Tax Credit .

Let's cover a few cash flow and balance sheet items. Q1 cash flow from operations was $18 million, which was an improvement of over $20 million compared to the same period last year and mostly due to favorable trends and accounts receivable. Q1 2012 ending accounts receivable followed a normal seasonal pattern by ending lower than the beginning of the quarter, versus ending higher in the same period a year ago. Capital expenditures were $4 million during Q1 this year and were largely comprised of technology related items.

Now let's take a closer look at the key assumptions in our Q2 net income estimate. We expect gross margin in Q2 of 26.4% to 26.8%. This equals about 40 basis points of improvement after excluding the 50 basis point benefit received in Q2 last year from the resolution of a payroll tax matter. Second quarter SG&A as a percentage of revenue is expected to be about 20% to 21% based on the revenue estimate provided today. This would result in about a 60 basis point decrease in our SG&A percentage from continued operating leverage.

Our guidance issued today expects strong incremental EBITA in Q2 this year. Excluding the previously mentioned tax benefit received in Q2 last year, we expect incremental EBITA for Q2 this year of about 15%. We expect an effective income tax rate for 2012 of 42% to 45%. This is higher than our normalized 2011 income tax rate of 39%, due to the expiration Work Opportunity Tax Credit program discussed earlier. This program provided employers with income tax credits for hiring certain disadvantaged individuals as defined by the federal government. This program has been renewed repeatedly in the past and reinstated several times on a retroactive bases; however, we cannot give any assurance the program will be renewed and it will be excluded from our income tax estimate unless legislation is enacted to renew it.

Lets cover a few remaining items for Q2 2012. We expect about $3 million to $4 million of CapEx, and diluted shares outstanding should be about 40.2 million. Our financial trends continue to position us well for the future. We hit our eighth consecutive quarter of double-digit revenue growth in Q1 this year. Our disciplined focus on pricing the business based on the value provided to customers is making a positive impact to gross margin trends. We're excited about both our revenue and gross margin trends as they are the foundation to produce strong operating leverage as we continue to monitor operating costs.

I'll now turn the call

Thank you, Derrek. We continue to pursue new value and create investment opportunities that will enable us to broaden the services we offer our customers as well as increase our efficiency in putting people to work. As we build new capabilities and drive further efficiencies for our customers we believe we will also provide higher returns for shareholders. There are three areas of strategic focus that we believe will continue to drive shareholder returns. One, our sales and service strategy; two, our technology strategy; and, three, our people strategy.

Let me first speak to our sales and service strategy. New capabilities and expanded market opportunities that we have built and invested in over the past few years have enabled us to serve more industries and broaden the partnerships we have created with several national and regional customers, and we remain confident in our vertical market strategy to drive growth with national, regional, and thousands of local customers who fit into one of these vertical market specialties. There are several components of our sales and service strategy that are fueling our success.

First, we have industry specific research and development for each major customer segment; Second, we have an industry leading sales and marketing strategy; Third, we have a dedicated sales team for each market; and, Fourth, we have strong relationships with each of the vertical markets we serve which is proven to expand our credibility in those segments on both a national and local level; and, finally, we have a proven method of tying this success of serving national accounts to the local market performance. Our proven methods of customer service have made us a leader in selling and serving large accounts yet delivering the successful candidate in the local market.

Technology is another driving strategic force for us. Last year we began working with technology that is focused on recruitment and Workforce management solutions. Left me give you a picture of how we intend to use technology in our operations.

In 2011, we put more than 300,000 individual people to work. Many of these workers were recruited through our neighborhood branch locations. For many of our customer requests we do not have the ability to recruit and fill job openings outside of that neighborhood recruiting model. We believe mobile recruitment solutions, particularly texting on basic feature phones can open up new methods of recruiting and filling customer job openings.

A test we conducted found that while less than 30% of our sample workforce uses the Internet daily, more than 90% routinely use their cell phone to text. We currently reach most of our job candidates when they visit our neighborhood branch locations or we call them on the telephone. We see an opportunity using text messages to identifying and reaching the right candidates and get them to work faster.

Our people are another driving force in our strategy. They have been able to anticipate and react to opportunities and challenges better than anyone. We remain committed to development and retention of our talent. We continue to recruit and develop our talent in all aspects of selling and servicing customers.

We know the value we create for our customers and shareholders is directly related to the quality of our employees. We will continue to make the appropriate focused investment in our people. We have a growing talent pool that is committed to helping us change the world by putting people to work. The combination of our sales and service strategy, our technology strategy, and our outstanding team members Companywide will continue our drive to be the leading provider of blue-collar staffing, and continue to provide outstanding returns for our shareholders.

I'll now open up the call for any questions you may have.

(Operator Instructions). Your first question comes from the line Paul Ginocchio with Deutsche Bank Securities. Please proceed.

Thanks for taking my question. Steve, I'm just wondering what percentage of your business now falls under the vertical sales market strategy? What does it look like today versus, I don't know, a year ago? Thanks

Thanks Paul, we have actually aligned most of our revenue opportunities and all of our sales into one of these verticals. How much of it is being sold by a national team of vertical sales that is probably ranging in the 40% range somewhere in that category and 60% being sold locally. But even the local market we are teaching these local market teams about the vertical approach and how to be connected and aligned with the expertise available in that customer's industry.

Great. And, Derrek, if can I ask just a couple kind of modeling questions. Revenue from your largest client, and you talked about green energy being accretive to growth, can we talk about construction overall how strong that was? Thank you.

Sure. So revenue from our largest customer was about $29 million, and as far as construction goes, I'd say, Paul, the trends been very consistent with what we have been talking about over the last couple of quarters. Construction over all being quite , quite strong. Energy driving a good portion of that strength in and construction as well as commercial construction. Residential still on the weak side. Hasn't really bounced back yet, but commercial and the energy practice doing

I think you talked about all in construction being up 40%. Is that sort of what it was in the first quarter?

That's about right. It's a little over 40%. About half of that coming from energy.

Thank you.

Your next question comes from the line of Sara Gubins with Bank of America Merrill Lynch. Please proceed.

Hi, thanks. Good afternoon. Could you update us on what revenue from Boeing was in the quarter.

Revenue from Boeing was a little under $39 million -- excuse me, under $30 million. That is what I was talking with Paul about it was close to $29 million.

Okay. And I'm wondering if you could talk about what you are seeing in the early part of April, the Q2 guidance suggests something of a slow down, but obviously you saw accelerating monthly trends through the first quarter.

Yeah, so revenue growth for the first quarter was about 13%. Our guidance for Q2 is about 11%. So an percentage basis that is a step down from a couple points. I think the main thing there is we are expecting less from Boeing, our largest customer. Boeing probably contributed about 1% to overall revenue growth in Q1, and we would expect it to maybe be a drag of a couple points in Q2.

Okay. And then just last, are you seeing any particular varying trends in larger versus smaller clients?

It has been pretty consistent this quarter, Sara. I know there has been a variety of reports from ADP to other statistics out there over the last couple of months on disproportionate swing over to new jobs and small customers, but between small customers and our larger customers the growth rates have still been pretty consistent this quarter haven't seen a lot of divergence

Okay. Thank you.

Your next question comes from the line of Jeffrey Silber with BMO Capital Markets. Please proceed.

Thanks so much. There has been a lot of talk in the press about the warmer than expected weather in the first quarter helping out the economy overall. I was wondering if you thought that had any impact on your business for the quarter?

Yeah, it did. And actually, this would be surprising to most of you but it was actually negative impact. A year ago we had a lot of snow removal in the northeast, especially and then followed up by flood damage and flood recovery that happened in Q1.

It is really too early in the year to be out mowing lawns, and raking up leaves, so you don't get to pick up anything from the warmer weather. We had drag from the warmer weather. Probably a little bit backwards from what you might have expected. But as far as having a pickup from warmer weather, we didn't see an impact from that.

Actually that was a surprising answer, thank you for letting us know that. On the SG&A side you came in a little bit lighter than the guidance that you had provided. Was there any SG&A that was deferred from the first quarter into the second quarter?

No. In the first quarter it doesn't take much to swing this SG&A percentage really, Jeff. If we are looking on SG&A as a percentage of revenue. A part of this was the revenue came in higher, and if you take the midpoint of our revenue guidance, SG&A would have been above the low end of this. You throw in maybe $0.5 million of cost and you are getting pretty close back to midpoint. So it wasn't that far off. We just didn't feel like giving a lot of real estate on $0.5 million or so of SG&A, and there wasn't really deferral there.

Okay. Great. Just some numbers questions. The A-1 acquisition has been adding about a percentage point in growth the past few quarters. Was it the same this past quarter?

Yeah, that's about right.

All right. And were there any branch openings or closing in the quarter?

Net closing of three.

Okay. And then in terms of 2012 what should we be modeling for stock based comp and for capital spending for the year overall?

I think you could look at stock comp. I wouldn't expect our patterns from last year to change much from a stock comp perspective. From a CapEx perspective expect $3 to $4 million a quarter. Take the midpoint of that and that might put you around $14 million or so for the year, CapEx.

All right. That is very helpful. Thanks so much, Derrek and

Your next question comes from the line of Jim Janesky with Avondale Partners. Please proceed.

How far along are you, Steve, with the mobile application launch, and when would you expect that can have a positive effect on both the top end of the gross profit line?

Well, throughout most of our business, we have tested it. We have put some of it out there already, but the real value drivers probably won't hit until 2013, where we are really conducting more business through texting. Right now it is more advertising if you will, and job alerts, and connecting with employees, so we will see a more powerful impact in 2013. Later in 2012, but we will be able to start to model that in for you by the time we get into Q1 of next

Okay. Derrek , if you mentioned this, I missed it. Did you talk about the trends of passing (Inaudible) increases on to the customers? How does that work this year versus

I didn't get into the specifics of it, Jim, but we are off to a really good start. Overall we had some higher credits last year. If you excluded those from our comparison, gross margin would actually be up on a comparison same quarter a year ago. So really good start for us, and a big part of that is jumping out of the gate strong here on the pass through. So we think we have got pretty much all of that passed through at the very beginning of the quarter, so we are really pleased with the start of the

So to the extent that you could get additional gross margin expansion as 2012 progresses, would that primarily come from mix, where Boeing and energy come in and then how construction progresses. I mean building permits were surprisingly up recently that is generally positive for your residential business, right?

Well, in general a return of mix both from small customers in general and specifically on residential construction would be great mix enhancements to the business from a gross margin perspective. Those tend to be some of our most profitable relationships out there. As we go through the year, if you take out any one-time or nonrecurring stuff out of the prior period, I think we are off to a good start here to have a few 20 basis points to 40 basis points of gross margin t expansion throughout the rest of the year all things equal. Just from the start that we got at the beginning of this quarter.

Okay. Thank you.

(Operator Instructions) Your next question comes from the line of Mark Marcon with Robert W. Baird. Please proceed.

Good afternoon, nice quarter. Can you talk a little bit about the differences that you are seeing between the various brands that you operate under, give us a little bit of a feel for any differences in terms of those trends between Spartan versus core, Labor Ready versus PlaneTechs, et cetera.

Yes, thanks, Mark. Well, in general the core business is running pretty consistent with one another. We have pointed out here today that the energy work has been a leader for us and the Boeing work was strong this quarter. So those two markets in those two categories were our strong points. Commercial construction has been strong. That is driving CLP to be a good leader for us. Labor Ready is picking up on a little bit of that, but CLP is picking up a lot on it.

Labor Ready serves a little bit more of the local and regional, the onezy twozy business. A earlier question about small business drivers verses large business drivers, and we have answered it is pretty consistent in all material respect. So the differences between Sparton and Labor Ready are running pretty similar right now. I think that is the material stuff, Mark.

Okay. And with regards to Boeing you said you expect a little bit less in terms of Q2. Can you quantify how much less you are expecting?

I think that Derrek pointed about 1% or 2% of revenue drop in Q2. It would have held the same rate, so you can calculate the rate there. But we have been projecting about $25 million a quarter as we finish 2011. Derrek just disclosed here today that it was $29 million. There was a little bit of a spike there. But long term that has been a big project that lasted a little bit longer than Boeing wanted it to. We were fortunate, and we have been a big part of there success there on getting that thing moving. At this point in time, the project we are working on, it still has a pipeline to it and a run rate to it, but it is starting to work it is way down. I know we have said that for a few quarters, but I think that the signal is that it is not a long-lasting project.

Now the good news is PlaneTech's is selling a lot of work in new categories, and we are looking for places to place those workers as they roll off that project. In our aviation business we have quite a few unfilled orders, it is probably our largest category where we can't fill all the work that we can sell. So workers that project, that's our success rate, it doesn't mean all that revenue goes away. So being able to place these workers as they roll off that project that is our success rate, It doesn't necessarily mean all that revenue goes away. It might change. It might change which customer, what revenue, and what mix it is at. But our goal is to place every one of those workers as they roll off those projects. So that will be our big success driver is how well we do that, Mark.

Steve, are those workers mobile? Can they go to where the work will be?

Yes, they are already mobile, most of them aren't from where that project is taking place. They are already travelers and having them travel to a new location that is kind of their Most of then are from markets that they can already place. lifestyle. So that's the answer.

Okay. Great. So no concerns there in terms of that dropping off at all?

Well , that project is coming to an end, and our challenge as a team is to get those workers placed on a different account where there is openings that we can't get placed, so making that transition and ensuring that the same quality of work that they want to do and that same type of work. So it is really working with the mechanic and selling them on the opportunity to go to this other client. So we do that well, we will

Okay. Great, and can you talk a little bit more about the energy. You mentioned that you are fairly confident that it is going to stay in place through this year. What is the long-term out-look? Are there other areas within energy to expand into?

Well, there are other areas and we are researching them rapidly. I think most people are well aware of the oil rush, and the projects that are taking place in North Dakota. We are not chasing that, yet, north of that in Canada we are chasing, and we are quite excited about having those projects come to bear and us really being able to service them is one thing, but we are on top of it. The solar business that we have been so successful at, some of it conditions that drove that business to boom here aren't in play. That being government backbones and tax credits and we are not the government financial predictors of all that, but there is some uncertainty around all that.

So we talk about the pipeline of projects that we understand and that gets us through maybe through 12 months. But definitely trough 2012, maybe as much as a year, but we don't have a forever ending pipeline because of the fundamental drivers of what created that solar business for us aren't in play. But we have a very talented team. They sold these projects, they serviced them, they are a leader in it, and I believe that we can either follow those projects to other geographies or put those people to work on other projects. That is our goal, we sell projects, we live and die by them. Let's live by them, and let's get some more. We are not pulling back on that, we are just being pretty open with you here, Mark, that we can see a year's worth of the pipeline

I appreciate that. You have always been very open. Can you also talk about any other verticals that might come along outside of the ones that we have talked about, for example, this past holiday season, retail was a pretty big surprise. Are there any other big initiative that you are working on besides the ones you have already mentioned?

Yes, our largest continue to be in aviation and energy, and you called that retail. We did have some success in Q4 with that, and we have continued that success and a couple of large retail accounts happen to be some of our largest growing accounts right now, so we are pretty excited about that. In my prepared remarks I talked about this ability to take this national or regional account that we sale, but you have got to drive it down to the local delivery, and our team has done a great job in not only selling the account, securing the account, but insuring that the order delivery gets handed to a local market person to do the recruiting and placement.

And if you don't have that entire pipeline put together, you can't pull this off. And this is where we can outshine others, and the fact that we've got a national footprint, we have a national team to be able to service nationally but delivered locally. And it is our sweet spot and we are not going to take our eye off of that sweet spot.

Great. And just a couple of quick numbers questions. Derrek, D&A was up a little bit this quarter. What is the expectations for the balance of the year?

Hi, Mark. We had a little bit of a spike up, a few very short, light purchases that we made. So depreciation of close to $4.8 million. I think it will be close to that. You may see that drop down as we move through the year because we had a little bit of a spike this quarter, but it would be close to that.

Okay. And interest income we had a nice bump last quarter, and went back to kind of the Q3 level, is that what you're thinking about for the balance of the year?

We had a couple miscellaneous items this quarter, I expect it to bounce up another $150,000 to $200,000 from what you saw this quarter as we move through the rest of the year.

Great. Thank you.

Your next question comes from the line of Kevin McVeigh with Macquarie.

Great. I was wondering if you could just give us little more color on the larger client strategy and ultimately over time what percentage of revenue will be represented by large verses small, to medium and how that compares to the past?

Yeah, thanks, Kevin. Continuing on some of the thoughts that we have delivered here today, that we have definitely put more resources focused on larger accounts that are spread across more geographies. That seems to be an area that we can win in where a more regional based staffing firm doesn't have that resource to serve in multiple regions, and so getting into that sweet spot of being able to take orders on a national base and be able to hand them to a local market is the strategy where we are well focused. The exact percentage and what that means and how you compare that to other to staff accounts gets a little dangerous Kevin, because what we call a large account is it based on the size of the client's business, or the size of the order flow, is our cut off the same as somebody else you're following. The differences vary so broadly. I can only compare it to our past, and say what we classify as a large account, not many years ago, maybe, five or six, was running 7%, 10% of our business, a large account.

Labor Ready alone that's running well over 20% now, and you throw in the energy business and Boeing and a few of these other brands and you can quickly add up, that 40% plus, maybe even 50% plus business is coming from large accounts. And like I said, five or six years ago it was less than 10%. And that is against our own definition not against industry standards. That is a mixed change we have been dealing with. There are some pros that come from that; the consistency, and working with other quality firms, and the level of communication and understanding on what drives success, all of those things are good. Yet, you fall hard when one of them walks way, and so that's a new part of our business we are getting used to. Plus they are pretty good negotiators and they understand the market flow better and they want pricing based on volume, so those things that we've talked about here in our business.

So our response to that is be very diligent on our pricing strategies, yet be very diligent on costs. So that is where we are focused is continuing to leverage this business up and find better ways to do that. And the key to that right now is technology, so we don't need to open more bricks and mortar, we can actually expand more territory, be in more places, put people to work faster and that's going to be our response to the national larger account presence. You can't really talk about one without the other. The growth in large accounts is good, but there has to be a response to it. So I think we're working both

Understood, and thank you. And then, Derrek any impact if Boeing starts to come down a little bit in Q2 what the impact is from a margin perspective on that?

I think that drop we are talking about here from a gross margin and overall mix perspective won't have much impact on the blended gross margin. It's just not enough to talk about.

Super. Okay. Thank you very much.

(Operator Instructions). Your next question comes from the line of Paul Ginocchio with Deutsche Bank Securities. Please proceed.

Thanks for taking my follow-up. Steve, the business has changed a quite a bit. I wonder if we can look at the Labor Ready gross margin excluding construction and maybe go back to 2006 when it was pretty good. I don't need exact. But what does that look like versus today if you can even compare it? Is that business gross margin similar, has it gone down, I'm just trying to understand how the core business five years ago looks versus today.

Right. Yes. It is hard Paul to ferret through that because construction accounts, for the mix change of construction alone accounts were 3 or 4 points, maybe 3 points in that brand, and then the large account thing you would think would start dragging on and it. And it did for a year or two, but the last couple of years our large account strategy has stabilized our margins pretty well.

These new accounts, even though they are large, we are selling them in about the average blend of the Labor Ready margins at this point in time, not much different. So I think things have stabilized at this point, even though you can look his historically and say they yes, the Labor Ready margins did drop they have come down for a couple of reasons large account focus, and construction going away, but I think we're stable at this point in time, Paul.

Thank you.

And at this time I would like to turn the presentation back over to Mr. Steve Cooper for closing remarks.

Thank you, and we sure appreciate the questions, and we appreciate you joining us today. Your attention and questions are always appreciated. We look forward to reporting the results of Q2 to you as we continue to drive industry leading growth and work on these strategies. Thank you.

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