TrueBlue Inc (TBI) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the TrueBlue conference call. Today's call is being recorded. Joining us today is TrueBlue's CEO, Steve Cooper and CFO, Derrek Gafford. They will be discuss TrueBlue's 2012 third-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 2012 Q3 earnings results which were announced after market close today. Please note that slides providing additional background on our Q3 results were included in our 8-K filing today and that the slides, press release and accompanying financial statements are now available on our website at www.TrueBlueInc.com.

Before I hand you over to Steve, I ask for your attention as I read the following Safe Harbor. Please note that on this conference call, management will reiterate forward-looking statements contained in today's press release and may make or refer to additional forward-looking statements relating to the Company's financial results and operations in the future. Although we believe the expectations reflected in these statements are reasonable, actual results may be materially different. Additional information concerning factors that 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, and good afternoon, everyone. Today we reported 2012 third-quarter revenue grew 2% to $379 million, which produced $0.36 per share of net income. Although net income per share for the quarter was in line with our earlier guidance, revenue for the quarter came in approximately $10 million lower than had been expected. The shortfall in expected revenue was primarily due to two factors. First, revenue from Boeing came in at $13 million versus the $18 million we had expected, and second, a shortfall in revenue from manufacturing clients of more than $5 million compared to expectations.

Let me address the revenue trends from Boeing. We're been fortunate to serve Boeing over the past few years on several projects in various locations as they prepare to deliver a new airline. As we have disclosed each quarter, we knew these various projects would ultimately level off and some projects would come to an end, predicting the exact timing of each project has been challenging. One of the most significant remaining projects started to wind down in the past quarter, and we moved the majority of our workforce off that project. Our current outlook for the fourth quarter reflects the impact of these adjustments in the work force. We are now estimating our quarterly revenue from this account to be $5 million compared to the fourth-quarter revenue a year ago of $30 million, a continuation of the revenue trend as more projects wind down.

I also mentioned the shortfall we experienced in the third quarter related to manufacturing. The additional shortfall in estimated revenue, which was broad-based across several accounts and most geographies, most notably in manufacturing. Overall, our manufacturing business declined by about 3% in the third quarter, the first decline in this category since 2009. Generally speaking, most other areas of our business performed as expected during the third quarter.

Looking to the fourth quarter, our revenue estimates reflect not only the adjustments related to Boeing, they also reflect the growing uncertainty in the general economic conditions. In addition to seeing manufacturing business decline, we have not yet seen significant sustained revenue growth in construction, except for inconsistent activity in residential and commercial remodel work. Finally, related to or fourth quarter revenue estimates, I want to mention the impact of the clean energy sector we have been successfully serving for the past couple of years. The energy sector has grown with unprecedented speed, and the TrueBlue team created new business opportunities serving this industry. We have energy staffing specific experience and have served on projects as varied as geothermal plant repairs, windmills, installations and our most recent success, building solar plants and installing solar panels on commercial buildings.

In the third quarter of 2012, revenue from these various energy projects was about $30 million. That is about the same revenue we achieved in the fourth quarter of 2011 and also what we are now estimating for the fourth quarter of 2012. These energy projects produced significant percentage growth throughout 2012 and now we have started to anniversary the impact much of this business in Q3. The energy business remains strong, and we are -- we remain excited about our ability to serve customers in this sector.

The flow of projects seems consistent enough to maintain our current rate of revenue. At this time, we are not currently projecting any growth in the service line for the fourth quarter. The full impact of all of these items is reflected in our fourth quarter revenue estimate today showing a decline in revenue of approximately 4%. Net of the Boeing impact, our business is estimated to grow 4% in the fourth quarter. So, all in all, given the circumstances discussed here today, the continued growth in our core operations continues to hold consistent.

Our operating margin of 6% for the third quarter was equal to prior-year. Our operating margin of 4.1% through three quarters this year has expanded by 30 basis points. Expanding our operating margins and now holding them flat with the current revenue challenges I have discussed is a huge accomplishment. Continue to expand our operating margins remains a high priority for our team. We know revenue growth is key to driving operating margins in a positive direction. We remain focused on growing revenue and we are committed to driving operating leverage in our future results. We will balance our cost structure to match our level of revenue as we work through the strategies we feel are important to driving ongoing shareholder value.

I want to discuss those strategies with you further. But first I'm going to have Derrek review with you further operational and financial details, after which I will discuss the specifics to our approach to driving our strategies related to growing revenue and aligning our cost structure to provide further leverage in our business. Derrek?

Thanks Steve. I'll start off today with a high-level discussion of this quarter's results and our fourth-quarter expectations. Then we will walk through the operational and financial trends along with our Q4 assumptions for these items. We will finish up on cash flows and then open the call for questions. Any reference to our performance is based on a comparison of the same period a year ago, unless stated otherwise. Also included in our 8-K filing today is a slide deck providing a summary of this quarter's results.

Diluted net income per share was $0.36 for the quarter, which was within our expected range of $0.34 to $0.39. Revenue of $379 million was lower than our expectation of $390 million. Despite the lower revenue, gross profit came in at expectation due to higher gross margin. For the fourth quarter, we expect revenue of $332 million to $342 million and diluted net income per share of $0.11 to $0.16.

Now let's review some of the key financial trends in this quarter's results, starting with revenue. Revenue growth for the quarter of 2% was less than our 5% growth expectation. In comparison with our expectation, total revenue growth was 2 percentage points lower as a result of a larger decline in Boeing revenue and one percentage point lower from less manufacturing revenue. For the fourth quarter, we expect a revenue decline of about 4%, which is a decrease of six percentage points in comparison with Q3's revenue growth of 2%. Three percentage points of this difference is related to further decline in our Q4 run rate with Boeing and three percentage points related to our energy business. As Steve mentioned, while we expect a healthy run rate in our energy related revenue during Q4, it anniversaries a more challenging prior year comparison.

Now let's discuss gross margin. Gross margin for the quarter of 27.7% was higher than expected and exceeded gross margin in Q3 of last year of 26.9%. In comparison with Q3 last year, 20 basis points of the improvement came from a payroll tax benefit this quarter, 30 basis points from mix and 30 basis points from pricing. We continue to leverage our blue-collar specialization and disciplined pricing approach to drive higher gross margin. We expect gross margin in Q4 up 26.8% to 27.2%.

Now let's discuss sales, general and administrative expense. Excluding the impact from Boeing, revenue increased by nearly $25 million this quarter and the variable SG&A associated with this revenue increase was the primary driver of the $4 million increase in SG&A. Boeing is served from a centralized recruiting and delivery model which has been successful in delivering quality services in a very efficient manner. The costs associated with this revenue and this delivery model are still in place to leverage across the business, which explains the lack of operating leverage in this quarter.

Compared to Q3 last year, SG&A as a percentage of revenue increased by 80 basis points, while operating margin remained the same due to the increase in gross margin this quarter discussed earlier. Fourth quarter SG&A as a percentage of revenue is expected to be about 22.8% to 23.8% based on our revenue estimate. Our effective income tax rate of 38.5% was lower than expected due to certain adjustments in our estimate. For the fourth quarter, we expect a rate of about 40%.

Let's cover a few cash flow items. Cash flow from operations was $33 million, which was an improvement of $17 million compared to the same period last year, primarily due to a normal ramp in our accounts receivable this year versus a steeper ramp last year. Year to date capital expenditures were nearly $14 million, ad we expect about $2 million of CapEx in Q4.

Our exclusive focus on blue-collar staffing has created a high level of specialization and insight into the industries we serve. This approach appeals to customers and differentiates us from the competition. Our specialization is the foundation of our strategy, which we remain committed to. That said, the market is changing and our areas of focus are as follows. One, restoring appropriate revenue growth. On a Boeing-adjusted basis, Q4 revenue is expected to grow by nearly 4%. Clearly, though, this is not enough as we expect revenue to decline by 4% on a non-adjusted basis.

Adjusting our sales strategies to capitalize on current industry, geography, and customer opportunities is our top priority. Two, continuing our successful pattern of increasing gross margin. Our specialized approach and the value it provides customers are key elements of our success. We are going to stay focused on what has worked here in this area. Three, increasing the efficiency of how we deliver services. This includes further leveraging our success in centralized delivery models for more skilled positions and leveraging technology. We are continuing our focus of using technology in a more strategic fashion to increase efficiency and further leverage our cost structure. Our priorities come down to revenue growth, gross margin and efficiency. We are rigorously using these priorities to eliminate any distracting activities to ensure our course remains on target.

I'll now turn it back to Steve.

Thank you, Derrek. As I mentioned earlier, I would like to expand on our approach to growing the revenue and aligning our cost structure to continue improving our operating leverage. Our sales and service strategy has expanded over the past few years to bring more focus to our customers' industry specialization. We will remain focused on growing our expertise in several industry markets as this is exactly what our customers are asking for today. Our sales and service approach uses a blend of centralized teams focused on national accounts along with our heritage of selling and serving in local markets. Our strategy to be more diverse in relation to our overall industry has helped us produce more consistent and sustainable results.

As I have previously shared with you, the past year we began implementing technology that is focused on recruitment, communication and assignment of our workforce to customers. In the past, most of our workers have been recruited through our neighborhood branch locations which have been investing in two key areas that we remain committed to and believe will drive further efficiencies in our business, starting in 2013. First is centralizing common operations to a higher degree and second, furthering our implementation of Mobile Solutions.

Let me speak to centralizing our common operations. We have been successful in several areas of our business to recruit, dispatch, pay and communicate with workers from a central location. We have early done this successfully for aviation mechanics, truck drivers, and skilled construction workers, and now we are seeing opportunities to expand these functions across more areas.

Mobile recruitment solutions continues to show great results and promise, particular texting, recruiting and filling customer job openings in a very efficient manner. We are seeing more opportunity to recruit, communicate with and place candidates via Mobile Solutions. We see a huge opportunity using text messages to identify and reach the right candidates and get them to work faster. I believe that a combination of using more centralized operations and using Mobile Solutions will continue to lessen our reliance on having several branches in local neighborhoods.

With these strategies, we will be able to drive our productivity per employee up, along with operating less branch locations. These are the most significant drivers in our operating leverage. In the first half of 2013, we will be in a position to better estimate the longer-term positive impact of these two opportunities, expanded centralized operations and Mobile Solutions. I strongly believe by sticking to our sales and service strategy of being specialized for our customers, along with our focus on driving our internal productivity, we will continue to -- our drive to be the leading provider of blue collar staffing and continue to provide outstanding returns for our shareholders.

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

Thank you.

(Operator Instructions)

Paul Ginocchio with Deutsche Bank.

Thanks for taking my question. First on construction, could you talk about what all in construction grew in the third quarter, including green energy projects?

Yes, we will grab that number for you, Paul.

And then also, Derrek, I was wondering about workers comp in the quarter and if there was any true-ups or reversals also, thank you.

The all-in construction growth was -- for the quarter was about 15%. Keep in mind that the vast majority of what is driving that is the energy business. There was some work comp adjustment for the quarter and that was about 120 basis points.

And what was workers comp overall?

Workers comp overall was 3.9%.

Great, and back on the construction, you said there was outside of housing and remodeling it was construction overall spotty. Can you remind us what percentage of your business is housing related?

Yes, about 5% or so.

In those comments -- I got those comments right on the overall construction market outside of green energy?

Paul, we've surely had some head fakes here, and good head fakes because there have been some significant remodel projects that we worked on over the last couple of years and they will go on for a quarter of two, and we actually have some new remodels that we're starting that are significant, both in commercial and residential.

I think our comments and our little bit of hesitation into giving too many positive signs in construction is they haven't been consistent enough for us to build a confident forecast off of -- we still have teams nationwide in the right markets that know how to sell and service construction. And as we've stated in the past, we do believe this will return and remodel work seems to return quicker than new starts. But there's good signals going on that this isn't going to go on forever, and we have shown that we are still able to jump on these projects as they come up. We're most pleased with our approach to working on the green energy products, and many of these same internal experts that we have on our teams that followed these projects and learned how to service them, these teams are still available and we still have our ties into construction markets all around. But your call out or your question about the consistency, or using the word spotty is about where we sae it right now. Just not a solid enough trend to offer solid forecasts there.

Thanks very much, Steve.

Sara Gubins with Bank of America.

Thank you, could you give us the current branch count? And do you think this will go down by the end of the year 2013?

The current branch count is 692 branches. We've got a track record here right now, Sara, of 5 to 10 a quarter. And as we continue to consolidate and look for efficiencies in the branch footprint. And I don't see us accelerating that beyond that trend before the end of the year. So, I think what you've seen from us here over the last two or three quarters of what you'll see here in the next quarter.

Okay, and as you think about next year, how you contemplating the branches?

Yes, this is where some of my comments about the process, the technology that we've been putting in play is starting to take hold. And we see -- we really need the first quarter to see some of it be rolled out and implemented. There's various portions of it, and we have spoken a bit about this, trying to become less reliant on neighborhood branches. Not leaving any markets by any means, and doing a consolidation of our teams to pull this together. We need to -- we have been working on the full impact, where we recruit and come into contact with the applicant. How we communicate with them, how we assign them to a job and ultimately at the end of the day, how we pay them.

And there are various aspects of that entire process that have been streamlined, and we have become less reliant on the branch network already. So, we are making good headway here, Sara. I -- we just need the first quarter of 2013 to really be beyond us before we can put our foot forward to give you a better impact of how many branches we believe will be impacted by the time we finish 2013. But we do believe it's going to be a significant number.

And as I think about the various segments that you have, it sounds like you're thinking that there's some opportunity for centralization and fewer branches in Labor Ready and Spartan, is that right? Are those really models that can be more centralized?

Yes, so as we brought these companies together through acquisitions and we had the Labour Ready model first and we brought the others in. We definitely centralized all of the support functions like accounting and IT and HR, and we brought all that to Tacoma, Washington. And what we really didn't do much work on is what is considered customer facing support services. Whether that be billing or interacting with the customer on a risk basis, contracts. And even to the most sensitive, and that's selling to the customer in how we go to market. We've kept most of those functions fairly separate, and we are definitely in full swing here of selling together and servicing together.

As we do that, along with this other technology implementation that we have talked about, it gives us the opportunity to first start centralizing some of the administrative duties. The things that go on inside of a branch, the way we pay workers and we have streamlined that and we've put their pay on electronic paycards. So, we're not reliant on having the branches in the neighborhood to -- for them to come by and get a check. Those types of duties can start to be centralized. Whether it's inside the market or inside the state or the region or even nationally, we're testing that and pushing the envelope really hard there, Sara.

When it gets to centralizing recruiting, and that's probably your main question, is in a branch network, how do you reach out and recruit and interact with the candidates? Well, we're having great success there too. Even the fact that on these energy products a large portion of these workers are found from centralized recruiting the way we reach out and interact with them and then start communicating with them and bring them into the process. Now, there is still 40% or so that are reliant on coming through that branch network, but anything that can be centralized is going to gain -- we are going to gain efficiencies off of. We are not looking at anything, any gain that we can get to bring process efficiency together, we are working on it.

Okay, good. And then just last question on gross margins. Could you talk about what is happening, both within pricing and mix that is helping drive those up? And I'm wondering if the lower revenue coming from Boeing is helping gross margin improvement. Thanks.

Yes, we're getting about, in our results this quarter, about 30 basis points of improvement that is just standard pricing. So, we are talking bill rates outpacing pay rates and covering any other statutory increases we have had and unemployment or things of that nature. We've also got about 30 basis points of sales mix impact that's benefiting our gross margin this quarter, which is exactly what you just pointed out, Sara. It's really all about the drop in revenue at Boeing which carries a lower gross margin than our blended average, and we're getting some mix impact benefit there.

Okay, thanks a lot.

Kevin McVeigh with Macquarie.

Great, thanks. Hey, I wonder if you could just give a little more color on -- it seems like the operating environment is becoming a little more challenging. Is that particularly the Boe runoff and manufacturing, or was it just any other areas?

Thank you, Kevin. It's a blend. We have separated our comments here today into three buckets. The first being be Boeing impact, which is significant. On a year over year basis for the fourth quarter, it is $25 million of less revenue related to that. So, as we mentioned here, without that impact, revenue would be growing 4%. With that impact, revenue is shrinking 4%. That is the first and largest impact.

Second is manufacturing clients across the board, across geographies, we are noticing some pullback. And for the first time since 2009, that grouping of customers we saw decline in the third quarter. And we forecast into the fourth quarter a decline. It is not large, it is in single digits, low single digits, but nonetheless, it is in a decline state. And so that's a tough category of what is going on. It falls right in line with what we have seen with full-time positions as announced by the BLS numbers each month that month after month there have been manufacturing layoffs and where that is headed. Now, we have a lot of other service lines that we work in, and the services and transportation and across-the-board we are seeing low single digit growth in most of these categories.

The largest then being Boeing, manufacturing not doing so well, everything else hanging in there. And then we have this large bundle of revenue, $30 million, that is not growing. It's $30 million last year and it's $30 million this year. However, it showed great growth over the last four quarters because it really hit $30 million a year ago. It provided some of our growth, and now it's not going forward but -- at least in the next quarter. Long-term we believe in these energy projects. We see the pipeline coming and there has been great news coming from the accounts that are putting up solar -- either building solar plants or putting solar panels and actually both on commercial buildings. So our baseline is holding pretty strong except that one category of manufacturing, and it's a bit spotty right now. Actually not spotty, it's declining 2 or 3 or 4 percentage points.

And Steve, not asking you to be an economist, but what you think is driving that slowdown on the manufacturing side?

I only can look at my own numbers and see and honestly, 50% of our impact is -- or a large portion of our impact is in the food manufacturing business, and that is a choice we made to not service some low margin accounts. So, some of it is there. Another large chunk is still widespread. It is hard for me to put my finger on it.

It's just a little bit of slowdown, a little bit of pullback across a lot of categories, and so it's not one big thing. And about 1 year ago, 1.5 years ago we talked a lot about the auto manufacturing industry and the slowdown related to the Japanese disaster that happened, and that has bounced back and that is holding really strong. And our team is servicing the auto manufacturing business are holding up pretty will. So, it's not that category. I think it's just general textiles and other manufacturing across-the-board.

Understood, and then if I could, one last one. Of the $30 million in revenue, it sounds like obviously the Boeing a little less profitable, but what was the operating margin impact, the $30 million in runoff in revenue in Q3?

You are talking about the Boeing account?

The Boeing. It sounds like, if I heard you right, I thought you missed by -- I'm sorry, $10 million, rather. 50% Boeing, 50% manufacturing. What was the blended margin impact of that $10 million in revenue?

On the EBIT outline or net operating income margins?

Either one would be fine.

They're about the same. The Boeing business was slightly more profitable than our standard business. The manufacturing is about the same. So, Derrek mentioned that a large piece of the -- the challenge that we have with us in this quarter and the next is the cost structure that supported the Boeing account, we have made a strategic decision to leave it in play, to expand it and use it and leverage other aspects of our business and grow other service lines. And we are seeing some inroads that -- we are going to watch that carefully, trust us. But right now, we see it as a better play to leverage that team and drive more revenue. And so we will have more to say on that in the next three to four quarters.

Okay, and again, you said you're modeling $5 million for Boeing in Q4, if I heard you right?

Yes, that's correct.

Super. Thanks, Steve.

Jeff Silber with BMO Capital Markets.

Thanks so much. Can you guys step back and review the different end markets in terms of the percentage of your revenue, either for the third quarter or on a trailing 12 month basis? Just so we are all up to speed.

Sure. I will go ahead and give it to you, Paul, and this is based -- or excuse me, Jeff. I will go ahead and give it to you, and this is going to be on a TTM basis, and I will round this out. Overall, construction runs about 30% of our business and the 10 points or so of that is energy related. Manufacturing about 20%, transportation about 10%, wholesale about 10%. Retail between 5% to 10%. Aviation, which is our Plaintext business, is running about 10% on a TTM basis, and services and other is about -- between 10% to 15%.

That's great, and then you mentioned that housing is running about 5% of the total. Can you remind us roughly that was last time at the peak?

I think that was about, at our past peak, construction was almost 40%. So, I'm talking total construction was almost 40% of the total. And residential got up to be about one-third of that percentage.

Great, all right, that's very hopeful. Just stepping back and focusing on the manufacturing area because that's the one that seems to be slowing down a bit, does this slowdown feel like the ones you have incurred before prior downturns? Or is it just something different?

It is different. Some of it is pricing based, as I mentioned, that we are not willing to chase some of that business down, and the margin's down with it. Some of it is choice, and we're not going to go there. Some of it is just demand has stopped. And it probably -- in a weird way it feels somewhat like the 2001 recession.

Back then, construction didn't slowdown and manufacturing did; this time, it's still not related to construction because construction isn't involved in this slowdown, that's really manufacturing driven. Very close to what it felt like then, that it was just a hard thing to put your finger on. It was broad-based, we see it start in one geographic area and start spreading and spreading. And sure enough, it spreads to a large enough geographic area that you definitely know that it's economic climate driven and not just one customer or one of our teams. And that feels very similar to the 2001 recession.

Certainly a lot different than 2008.

Yes, no, that is actually helpful.

Slowing signs, some danger signs, but nothing nearly as imminent or rapid that we saw towards the end of -- middle of -- end of 2008.

That's great to hear. And that you've called out in the past your business with your large customer, Boeing. Are there any other relatively large customers where you have some big projects that we might have to be concerned about those coming to an end?

I think categorically that the energy, the clean energy projects, we have been fairly open about that. Actually, over the last few quarters I think we have been more uncertain than we are now. At think we have developed some better -- a better feeling about where that's going with our customer over the next 18 to 24 months, that it feels a little stronger, and it's not as uncertain as the Boeing was, it's a larger category, it's more projects. There's a pipeline you can actually see. As we signaled with the Boeing account, it was meant to be short-term and it lasted a lot longer than we thought it was going to. We were appreciative of that, we served them well and we remain ready to serve and then we still have that structure available. So yes, Jeff, I think the risk category, if you want to put it like that, is energy.

All right, great, and then just one quick numbers question. What share count is embedded in your earnings guidance for the fourth quarter?

About $40 million.

$40 million? Great, all right, thanks a much.

(Operator Instructions)

John Healy with Northcoast Research.

Thank you. I wanted to ask little bit more about the Boeing expectations going forward. I know you mentioned $5 million for the fourth quarter. Is that a decent run rate this day in the business? Because I thought Boeing was a Plaintext customer, even before this project that ramped up, and was trying to understand maybe what we should try to embed in our expectations for 2013. I think $5 million is a pretty reasonable run rate and represents our best estimate of a go forward run rate beyond the fourth quarter. Okay great. And then and I wanted to ask hypothetically how you see maybe things setting up for 2013. I know it's too much uncertainty and probably too to look out, but when you are planning and managing the business, and when I hear your comments it sounds like, hey, we are keeping the Boeing infrastructure in place because we think there's opportunities to leverage it across other areas of the business. You sound very bullish about the pipeline of opportunity on the clean energy. As I think about 2013 and think about the revenue headwind that Boeing is next year, is a realistic to think that if we continue to stay in slow growth environment where maybe you guys continue the core organic growth rate at a similar level with the opportunities in clean energy that you could still produce year-on-year type revenue growth in 2013 over 2012? Does that sound reasonable, or is that too far of a stretch?

I appreciate your insight there, John. It will have to look different than the fourth quarter, so we'll just go that far. We've -- we're forecasting a decline in the fourth quarter. We had a strong fourth quarter in our branch -based business outside of Boeing and outside of energy last year. And so that is driving a bit of it. That dissipates a bit.

We get more to a consistent level by the time we get to the spring. It doesn't take a lot of pressure off in what we're doing to get 5%, 6%, 7% growth in this business. Heavens, we are not throwing the towel in by any means on 2013 at this point. Trends change quickly, and we know what we are up against right now. And I think there is a lot of fundamental reasons why companies will continue to turn to temporary staffing and we stand ready and we stand as a strong leader in this industry. Yes, I don't think that there is a long-term issue here. I think this is working through the next couple of quarters.

Now, things are changing. We recognize that. The way we interact with the candidates, the way we interact with our customers is changing. We've acknowledged that here on this call several times. We work on that internally a lot on how we are approaching the markets, how we're approaching clients, how we are interacting on a large customer basis versus the local markets, and that is going to continue to change. Technology impacts this and availability of information changes the way we do business. I believe we are pushing our envelope really hard there and we are preparing our teams to absorb that change. That will make us more efficient.

As we succeed on a centralized business and this mobile solution, we can continue to take cost out of our system. The more cost we take out of our system, the more opportunity we have to service accounts that don't require as high a gross margin. We don't need to be playing up in the 30% and 25% margin-only business. We can play better in the 20% margin business and there is more work there. That gives us an opportunity to grow and to focus and to grow that category. We can only do that, though, as we focus and bring our own efficiencies into play. We are well aware of that.

I know you were asking specifically about 2013. I'm giving you more signal of, let's work through a couple quarters here. We're not throwing in the towel, we know specifically where we are. It doesn't take much to turn that manufacturing number around. Or better yet, let's turn this construction number around. It's on the verge, and we have several other things we're working on. Several things we haven't talked to you about here that are getting to be pretty exciting.

Great, thank you for your perspective. Thank you.

Mark Marcon with Robert W. Baird.

I can't let you say we're working on several things that we haven't talked about without asking what those are.

Hey Mark, good afternoon.

That was a heck of a lead-in.

Make your job easy.

I was surprised somebody else didn't follow up on that.

You just happen to be next in the queue. So, but thank you.

We're working on other verticals. And so the way that we approach the hospitality business and the way we interact with large accounts in the hospitality business, whether that be large companies that deal with the cafeterias of hospitals, of colleges and universities. The way we interact with some of the larger hotel chains. The way we interact with events that are going on around United States and the teams that organize those events. We are increasing our statute there. We were bringing on the right expertise to guide us on our own teams, and this technology that we're talking about helps us succeed in those categories. It is things like that, Mark, that this strategy of being specialized with a customer, yet with blue-collar jobs, gives us the opportunity to look across a larger spectrum than we have been looking and succeed, so.

And how large did you say hospitality was right now?

It's in that camp of 15% of services.

15% of the services?

No, Derrek said services and other is 15% of our revenue in there.

Okay. In terms of the energy projects, how -- what percentage of those are alternative?

Alternative to what?

Alternative or clean energy as opposed to more conventional fossil fuel type projects.

The bulk of it. Yes, when we got -- we first got our toe started in this a few years ago, it was tearing down oil refineries and helping reset them. But now it has shifted mostly to a year ago, it was a lot of wind and this year it is a lot of solar.

Our team has just gotten really good at this area, Mark, of not just the industry knowledge, but just bringing some great productivity to the table for customers. They really built up a great competency in this area, a great niche here in the clean energy area, and we think there is some more runway here, too.

How long do those projects typically go for? Because it's -- I think --

There is various categories, so if you're putting up a solar plant, a solar plant, it depends on how large it is, could take anywhere from 6 months to 18 months, and there's several of them. We have been working on the largest one for several months. So it's --those will have a lot of tail on them. Another aspect to that business, though, is putting solar panels up on commercial buildings, and that's got a long tail to it. That's across a lot of geographies and a lot of clients and a lot of situations. It looks -- it is right in our sweet spot because we are in so many markets and be able to recruit those skills.

You don't have a concern that some of those projects should go away with certain tax credits?

Yes, I have a concern that -- all that, yes. But it's not in our -- we were more concerned a year ago that we are right now. We've seen a better tail.

What have you seen over the last year that has changed your concern? Is there anything specific other than --

I think it's the better relationship with our client, and we see their insight, and they're including us on their project planning. Not only the planning, but the bidding of projects. They're relying on our expertise, we're actually part of the process to show that we can bring the labor to the project as they are being bid. So, we have a lot better insight into the project flow and the pipeline that exists out in front of us. And we didn't have that insight a year ago. We were on a couple projects and serving well, but our teams have really become experts in helping this industry grow its way out.

We've got three or four projects that are marked that are winding down, that do have these tax credits. And I think what you're referring to are the federal tax credits. We've also got three or four that are on an equivalent scale that are starting up that have none. And there's a couple other dynamics here that have come into play, and that is that states are bringing their own incentives and there has been more states coming on over the last year, which gives us some confidence. And then there is just a price per kilowatt on energy, it's only running about 25% above where oil is and coal right now, which is the closest it's ever been, and that is without tax credits. There's more technology out there, going to work on the battery side to store this, this energy. I think there's a lot of dynamics in place that are seeing the trajectory of this alternative energy is getting pretty close to other comparable fossil fuels.

Great, that is terrific color. And then with regards to Boeing, you guys have been warning for years that it would fall off. And you have been saying it for so long and it never came, and what -- do you know I happened? Or can you say what happened just in terms of the suddenness of the drop-off?

Yes, it was --

Relative to your expectations.

The largest driving factor that has caused it and caused us even to warn and talk about it is most of our work has been -- as the 787 was produced and made it through the production lines, yet hadn't made it through full testing and flying, any plane that had made it through production, any time there was a change order to the process, and had to be pushed through the planes that were already through production and on the ground. A large part of our work was pushing those change orders through for Boeing partners, not necessarily just Boeing. We lump all that business together because it was related around that one production. As time goes on, they have improved their production facility, and that's the number one driving thing is they're getting spot on in what they're producing and there's less change orders.

Secondary to that is anything that was little bit more lasting. In certain given states, the union says this isn't going to play out well if these look like permanent jobs or this project's lasting too long. And so that applied a little pressure, and I think some of these positions Boeing turned into full-time jobs, the ones that were lasting a little bit longer. Those are two driving factors, and we respect both of them.

Great. You had mentioned in the past that maybe there might be some other projects coming along on the aerospace side. How is that looking?

Well, we are pushing hard. We have the right teams with the right account relationships, both in military and other manufacturers. These are a lot longer sales cycles than anything we are used to around here. Being project oriented business, we know how to dive on projects, we know how to dive on disasters, we know how to dive in in situations that are out of control and bringing organization to chaos. But a sales process that takes two years or three years, we are not very familiar with those. And so we are learning how to be patient in those military processes and looking down the road longer.

You look at, a lot of these clients have seven-year pipelines on back orders, and they plan their business a lot longer than -- over a lot longer period. We are getting good indications and we have won some projects in some other areas that we feel good about. A year ago, I couldn't have said that we have much military-based manufacturing business, and that number is going to approach $10 million next year. We weren't putting diesel mechanics that worked on trucks to work very long ago, and that's going to be a $10 million line of business for us. Those sound small on our large thing, but they're start ups, that's where the team's focused, and it's good blue sky for -- to know that we have a start up product line and drive it. But it's really about a larger pipeline and how large military could be. It could be a $500 million business. And so our hope and our desire and focusing the right teams and investing in our strategy there, it is worth it to hang in there and keep that cost structure in play and actually even add to it to ensure we have the right sales people in the right categories. And it takes a little bit of investment right now, a little bit of patience.

I appreciate the color, thank you.

Randy Reece with Avondale Partners.

Pretty much my questions have been answered, thank you.

Okay, thanks, Randy.

Sara Gubins with Bank of America.

Thanks for letting me get in a follow-up. I don't know if you're able to characterize this, but I'm wondering what percentage of SG&A is in the branches today versus currently centralized. Thanks.

Yes, it's not an exact number because we don't -- there's so much sharing that goes on. And there's the customer that's at a national level, yet all place -- most all placements are at a local -- go through a local branches, especially in that branch-based business. About 70% of our business, I would say, goes through our branch-based business. The energy business is a mix of the two and it may change that by 5%, so maybe 65% or something like that, but. It's about one-third right now.

Okay, thank you.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Steve Cooper for closing remarks.

Great, thank you. We sure appreciate your attention today on the call and the questions that you have asked, and we look forward to updating you as we move forward. Have a good day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.