TrueBlue Inc (TBI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 TrueBlue earnings conference call. My name is Whitley and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Stacey Burke. Please proceed.

Thank you. Here with me today is TrueBlue CEO and President, Steve Cooper, and CFO Derrek Gafford. They will be discussing TrueBlue's Q3 2013 results which were announced after market close today. Please note that slides providing additional background on our results were included in our 8-K filing today. The Company's press release and accompanying financial statements are now available on our website at www.trueblue.com. There is a presentation providing additional information about her Q3 earnings results on our website as well under investors/presentations.

Before I hand you over to Steve, I ask for your attention as I read the following Safe Harbor. Please note on this conference call management will reiterate forward-looking statements contained in today's press release, and may make or refer to additional forward-looking statements relating to the Company's financial results and operations in the future. Although we believe the expectations reflected in these statements are reasonable, actual results may be materially different. Additional information concerning factors which could cause results to differ materially is contained in the press release and in the Company's filings with the Securities and Exchange Commission including our most recent Form 10-K. I will now hand this call over to TrueBlue CEO, Steve Cooper.

Thank you and good afternoon. Today we reported 2013 third quarter revenue grew 19% to $451 million which produced $0.48 per share pro forma net income, which excludes the nonrecurring transaction costs associated with our most recent acquisition work. Though both revenue and net income per share were in our range of previously discussed expectations, revenue for the quarter was at the lower end of our expectations while for the pro forma net income per share was at the higher end. The combination of slightly lower than expected revenue and slightly higher than expected net income was driven by the ongoing story of gross margin improvement, which continued into Q3. This comes with a discipline of appropriately pricing new business and improving the lowest performing accounts through price increases for ending the relationship if necessary.

This has been an important and successful strategy for us during 2013. We understand the importance of maintaining strong gross margins that reflect the specialization we bring to the marketplace. As we have reported throughout 2013, our results include the acquisition of MDT personnel was closed at the beginning of February. The integration has continued go very well. All sales and service operations integration was completed by the end of Q1 and the support center integration was completed in Q2. The combined business is performing very well and we are encouraged that our approach to integrating the organizations in the manner we did created great synergy and our combined customers are receiving better service from our combined organization.

On September 30, the first day of our fourth quarter, we announced that we completed the acquisition of The Work Connection, TWC, a light industrial staffing provider with 37 branches located predominantly in the midwest. TWC's operations are currently being merged with those of Spartan Staffing to expand our light industrial service line. TWC is a great fit because they share our commitment to service and they serve many of the same industries with minimal overlap in our offices. This provides us with additional geographic reach which we continue to seek. We are excited about the addition of TWC's talented employees, leadership, and expertise to our organization. As we have previously stated, we expect long-term growth for blue-collar jobs here in North America, and this positions us very well for continued growth through a combination of acquisitions and organic growth from existing service lines.

Our strong balance sheet puts us in the position to acquire other quality companies and we will continue to look for opportunities that will expand our geographic reach and enhance our ability to serve our customers' needs. We are pleased with the organic growth we are experiencing in our teams across all areas of our service, both geographically and by industry. They are executing very well as we have seen these growth rates remain consistent throughout 2013. Seeing revenue growth at these rates and improvement in gross margins is the result of great execution by our teams. As shown in our revenue growth guidance for Q4, we are optimistic with the opportunity to continue the trends we experienced in Q3.

Although it is somewhat difficult to see in our EBITDA results here in 2013 so far, it is important to know that we have approximately $7 million of costs in 2013 related to acquiring and integrating MDT and TWC. Excluding these costs, our 2013 adjusted EBITDA margin would be approximately 5.2%. In addition, excluding the loss of the Boeing work here in 2013, our adjusted EBITDA margins would've expanded during the year by 50 basis points. As we move into 2014, we expect to see this expansion in our EBITDA margins to hold. This comes as a great result of the leverage gained from our core business growing strongly along with the synergy impact of the significant acquisitions here in 2013. Our Q4 estimates that we have given you today show this momentum that we have gained, and we estimate that will carry into 2014.

Before I turn the call over to our CFO, Derrek Gafford, for further analysis, I want to make some comments regarding our growth opportunities. The current economic climate allows us to continue to pursue further acquisitions while we also aggressively pursue organic growth through the execution of our sales strategies. Our main criteria for selecting acquisition opportunities continues to be first, ensuring it fits our strategy, second, can we get the expected ROI on the opportunity, and thirdly, can we integrate the target into our organization to ensure all our objectives are met, especially expanding opportunities to better serve our customers. There seems to be adequate opportunities available for us to continue to seek growth through acquiring strong companies.

We are even more encouraged by the opportunities to grow our revenue organically. We are seeing our strategies for organic growth in two areas working very well. First, our sales and service strategy has expanded over the past few years to bring more focus to our customers industry specialization. We remain focused on growing our expertise in several industry markets as this is exactly what our customers are asking for. Our sales and service approach uses a blend of centralized teams focused on national accounts along with our competency of selling and serving in local markets. Our strategy to be more diverse in relation to our overall industry approach has helped us produce more consistent and sustainable results.

Second, we have made great progress in implementing technology that is focused on recruitment, communication, and assignment of our workforce to our customers. In the past, most of our workers have been recruited through our neighborhood branch locations. We have been investing in two key areas that we remain committed to and believe will drive further efficiencies in our business by eliminating our dependency on our high number of branch locations and enabling us to fill more orders through access to more workers using technology and innovative approaches. This is assisting us in centralizing common operations to a higher degree and communicating with our workforce through better use of innovative approaches such as mobile solutions. As we rely on more technology and innovative approaches to engage with our workforce, we are reducing our dependency on our high number of neighborhood branch locations.

This will further reduce operating costs as a percentage of revenue while giving us further access to more workers with a faster and more consistent fill rate for our customers. I strongly believe by sticking with our sales and service strategy of being specialized for customers, along with our focus on internal productivity, we will continue to provide outstanding returns for our shareholders. As we have stated, we remain optimistic about the staffing industry. There are strong economic drivers out there along with continued regulation that make our industry an attractive solution for businesses that are growing and need help with the blue collar workforce solutions. I will now turn the call over to Derrek.

Thanks, Steve. I will start off today with a high level discussion of the quarter including a summary of key factors driving our results. Then we will drop into a deeper discussion of our business trends, including our expectations for the future. In my commentary today, any reference to our performance is based on our comparison to the same period a year ago unless stated otherwise. Diluted net income per share came in as expected at $0.47 excluding non-reccurring transaction costs mostly related to our acquisition of The Work Connection at the beginning of Q4 this year. Pro forma diluted net income per share was $0.48.

We are pleased with the continued progress in our acquisition strategy. The Work Connection acquisition adds $90 million of go forward annual revenue to our business. This expands our light industrial business by providing contiguous geographic growth to our Spartan Staffing business line. We expect integration activities to be substantially complete during the fourth quarter this year. Additional information on this acquisition is available at our website or in the original 8-K filing. Now let's take a deeper look at this quarter's results starting with revenue. Revenue of $451 million was under our midpoint expectation of $455 million due to later than expected start dates on a few energy projects. Go forward demand in our energy business is healthy and consistent with demand we've experienced earlier this year. Total revenue for the quarter grew at 19% with organic growth in the mid-single digits.

Now let's cover gross margin. Gross margin for the quarter of 27.4% was 20 basis points above the high end of our expectation driven by active management of our bill rates. We see our gross margin progress along with our organic revenue growth as further evidence that our specialized services are valued by our customers. Gross margin for the quarter was 30 basis points less than Q3 last year. The acquisition of MDT in Q1 this year carried a lower gross margin creating an estimated decrease in the blended company average of 100 basis points. The decrease from MDT was largely offset by the effective management of bill rates mentioned earlier as well as positive revenue mix from less flowing revenue which carries a lower gross margin.

Now let's discuss sales, general, and administrative expense. SG&A as a percentage of revenue was 20.1% and at the top end of our expectation due to the lower-than-expected revenue and additional acquisition transaction costs mentioned earlier. Compared to Q3 last year, SG&A was up $13 million which breaks down into the following category -- an estimated $10 million from ongoing branch and field management expense that came with the MDT acquisition, and $3 million of costs in the rest of the business. Let's switch gears and look at SG&A from a leverage perspective now. This quarter's SG&A as a percentage of revenue was 40 basis points below Q3 last year. Let me point out two items that are negatively impacting our comparisons. One is the drop in Boeing revenue which is service from the largely fixed cost structure of our PlaneTechs centralized delivery model.

Second is the acquisition transaction costs mentioned earlier. Excluding the impact of these items, pro forma SG&A as a percentage of revenue would have declined by 80 basis points compared to Q3 last year. Depreciation and amortization and our effective income tax rate were both in line with expectations. Now let's turn to our thoughts for Q4 of 2013. We expect revenue of $430 million to $440 million, representing growth of about 26%, which includes a full quarter of revenue for The Work Connection acquisition. Excluding The Work Connection acquisition, we expect revenue growth of about 20% which is in line with our Q3 growth this year. We expect strong growth in our profitability for Q4 this year. Diluted earnings per share is expected to be $0.30 to $0.35 or about $25 million of EBITDA. This represents EBITDA growth of about 65% or well over 100 basis points of EBITDA margin expansion.

Here are a few details included in our profitability expectations for the fourth quarter this year. Gross margin should be 26.3% to 26.7%. The Work Connection acquisition, which carries a lower gross margin than our consolidated gross margin, creates a decrease in the blended company average of about 60 basis points. SG&A as a percentage of revenue is expected to be 20.2% to 21.2%. Depreciation and amortization should be about $5 million or about $300,000 higher than Q3 this year due to the intangible asset amortization associated with The Work Connection acquisition.

And our effective income tax rate for the quarter is expected to be about 35%. While we are not providing guidance for 2014, let me point out two items. First, we will anniversary the MDT acquisition in February next year which will impact some year-over-year trends. And second, the worker opportunity tax credit has not been renewed for 2014. This program has been renewed repeatedly in the past but usually on a delayed retroactive basis. In the event it is not reviewed prior to reporting our first quarter results in 2014, this benefit will be excluded from our income tax provision. This would raise our normalized 35% income tax rate to approximately 40%.

We are excited about our continued organic and acquisition growth. Our team has continued to deliver mid-single digit organic growth throughout the year while delivering solid gross margin performance. These trends along with our strong operating leverage bode well for continued expansion in our EBITDA margin. We have also completed three acquisitions this year. Our competencies in evaluating, completing, and integrating acquisitions enable us to achieve investment returns far above our cost of capital resulting in higher returns for our shareholders. All right. That's it for prepared remarks. Operator, you can open the call for questions.

(Operator Instructions )

John Healy, Northcoast Research.

Steve and Derrek, I was wondering if you could talk a little bit more about the recent acquisition that you made. I was trying to understand maybe a little bit maybe how this property came into the portfolio as well as how you see this fitting in from a -- I guess from a strategy standpoint as well as from a personnel standpoint. Are you looking to retain most of the talent? Are you going to keep a lot of the branches? Just trying to see what made you so excited about this asset.

Thanks, John. The Work Connection, their headquarters is in Minneapolis St. Paul area. About half of their business is in the State of Minnesota and then the other half is spread out to states close to that. The footprint happened to be in areas where we have not expanded our Spartan business and our Spartan business is the service line that really serves customers on a longer-term need basis. Inside jobs, warehouse jobs, manufacturing jobs, and whereas our more traditional Labor Ready business serves outside jobs for the most part, not 100%, but shorter term, harder to fill and so that's the contrast in the two. And as we've expanded out our Spartan business, we have been somewhat cautious to open offices.

We have been retooling some of our more traditional Labor Ready offices to do some of that work, and this was such a great fit because it was just a good comp to the Spartan business and it fits well with the Labor Ready business where there is overlap. We made the choice, blend this with Spartan, which results in not closing offices, not laying off employees, and we believe the best path forward to serve the customers and the workers the best. So the opportunities ahead appear to be very strong. We are only three weeks into this and sales growth is gaining momentum through the acquisition which is one of the things that would like to see early on.

It looks a lot different than the MDT acquisition that we did earlier in the year for that one was a direct fit with our Labor Ready service line where we are located in most all markets there was a lot of dual resources at that time. We kept those employees and we consolidated offices. There was a lot more closing costs and a lot more integration costs associated with the MDT transaction. $6 million on bringing on $200 million of revenue versus this time around about $1 million of integration costs on just under $100 million of new revenue. A little bit of a compare and contrast for you, John, on the differences in those two acquisitions. It came to us through just a network that we have built of family-owned businesses, private equity owned businesses, and various brokers that are out there and that's how most of these deals come to us is through the network of relationships we have built and their understanding of our desire to pull these together.

So this one happened to be a family-owned business and it was at a stage of growth where we brought on the younger family member and the older family member was able to retire and the younger family member is going to be a great leader for us and is charging forward. This was just a win, win, win all the way around.

That sounds definitely like that's the case. I wanted to ask you, you mentioned you are pleased with the organic growth that you're seeing in the business and I know it's hard probably to give us a precise organic growth figure with the -- how you have integrated the MDT acquisition. But was wondering if you could just talk about if you look that business and you look at your own business, put bill rates aside, but what sort of growth have you seen year over year in overall placements in terms of temps on assignment. I was wondering if you could give us a little bit of color there.

I will take that one, John. I'll just speak to it in revenue. I mean if we are going to speak in placements, it's going to be pretty close to the revenue growth with the exception of some bill rate inflation in there, and if you take our revenue growth this quarter of 19%, you know about 15 points of that is acquisition related growth. The other 4 points is organic, approximately. Now keep in mind here that we've got some headwind we are still working through with Boeing, largely we'll wind most of that down. But if you take that out and say how was the rest of the core business going, the business you had coming in to the year, that's been running 5 to 7 points of growth approximately.

Maybe a little bit to the higher end of that range right now to the degree we are off between the categories, we could be off a couple of points here but it has been performing really well, and I would say most of that performance is when you take a look at it, it's quite widespread. It is not one particular industry, not one concentration in geographically, even areas where we have no overlap with any acquisition presence, the growth there which is very clean is growing quite nice. And so I think it really comes back to the organic growth really being a solid 5% to 7% growth story excluding Boeing through most of the year and it being quite widespread across geographies and industries that we serve.

Good to hear, and then just a final question from me. I just wondered if you could give us a split in terms of where you guys are at right now in your construction business between residential and nonresidential activity, and maybe how did that kind of compare to maybe where you were four or five years ago?

Sure. This is on the TTM basis, it doesn't have of all of MDT in here, but it is fairly close. We are around high teens from a nonresidential perspective as far as our mix of business. I will call it 17% to 19% of our business is in what we consider nonresidential and 5 to 6 points of our business on a TTM basis mix is residential. That puts you in the low 20%s, call it almost 25% mix of business in construction. If we were to go back, I don't know if we really want to go back four or five years ago, if we did it would be in the teens. If we went back prior to the recession, and I'm speaking on an overall construction basis, instead of being in the high teens, it would have been probably in the 35%, maybe pushing 40% right after we acquired CLP.

40%?

Of our overall revenue came from construction.

Perfect. Thanks.

Paul Ginocchio, Deutsche Bank.

Steve, did I hear you right? You said you expect that 50 basis points of underlying EBITDA margin improvement to go through 2014. Is that correct?

Yes, thank you, Paul. You know, looking at our 2013 year-to-date numbers, it looks like we've gone backwards in our EBITDA percentage and so the first adjustment that we call out is the acquisition cost, the integration costs of these two large acquisitions we did, the largest cost being MDT in the first quarter and second quarter and now here in the fourth quarter, you will see $1 million of costs related to Work Connection. So that $7 million gets us even, back even compared to 2012.

5.2% to 5.2% and if you make the adjustment for what did Boeing do because we know that that was served on somewhat of an on-site and there weren't a lot of costs that went away when that work went away, that's 50 basis points and so this year would have turned out to be 5.7% or so of fully adjusted, including the acquisitions and including the Boeing impact. So as we move into 2014, our commitment here is you've got to hold that and let's go from there. And you know we have a longer term commitment to improve it beyond that. At least it puts a stake in the ground to say this is the movement we made in 2013 in our real business and we believe that we can leverage up from here now.

Great. If I could just ask some small ones. Just on The Work Connection, Derrek, was there any customer concentration to speak of?

No. There really isn't, Paul. It's a pretty distributed pattern of customers, a nice mix, very much like our Spartan business as far as mix of customer concentration which does not have any sizable call outs.

Great, and then 17% to 19% exposure to non-res, does that include sort of your green energy business construction?

No. That excludes that, Paul. I was just trying to keep that apples to apples with where we were in the past. If we were to throw in industrial/energy, that's another 7, 8 points of our overall revenue mix in that area.

Great, and you said some of that was delayed. When were those projects supposed to start? And I think earlier this year there was talk about a big solar project starting in the southwest and maybe some potential to land some Alberta oil sands project. Are those the projects that we are talking about?

These were different projects. Most of this occurred in July. The slip in the dates and you can see that in kind of some of our month-over-month trends if you take a look at our quarter. You know, with these types of projects, this happens quite often. You have got permits, you have got financing, there's a lot of different factors. Here, we had a small handful of projects that all happened go one way. Usually kind of split and some go a little faster and some go a little slower. I think the important call out here though is that it's not indicative of any slowdown that we are seeing here. Our business in that pipeline stayed nice and healthy and that is reflected in our guidance for the fourth quarter.

And it looks like, and I know it's difficult to do, but it looks like at least based on my calculations, there is sort of no underlying acceleration in the organic growth rate in the fourth quarter based on factoring in The Work Connection and MDT. Is that sort of our how you're guiding? Is that the right way? Am I thinking about it the right way or do you think there is some underlying organic acceleration?

There is maybe about a point here, you know it's -- I'm kind of skating out on the ice trying to slice it that thin. We guided -- we brought revenue in at 19% this quarter, third quarter, and if you strip out of our guidance The Work Connection, our revenue growth guidance for the fourth quarter was the same composition of business that we had in the third quarter is 20%. So it's actually taking up about a point.

Okay. That's helpful. And then just can you talk about what the revs from Boeing in the third quarter and Steve, you spoke quite strongly about possibly about mobile last quarter. I think that's based on the pilot roll out. Is all of that what you said last quarter still hold true and you still -- it sounds like you still have positive about mobile and I just wanted to check with you. Thanks.

Revenue for Boeing for the third quarter of this year was about $6 million. I'll let Steve take the --

The mobile solutions app is completely out. It's in the hands of our workers in our branches and they are fully communicating job opportunities, their dispatching through it and the nice part is the leverage that creates the one of our recruiters can sit down and communicate with hundreds of workers through this application. It's pretty powerful. The stories are rocking and rolling about the number, not only the number of quick placements that we can get but the reach is what is amazing, Paul. How far one office can reach to place workers. So we are busily working on well how to we recruit out there without offices then. We know that we can service, we can dispatch, we can pay, we can communicate with, and we are being cautious, we don't want to take resources like a branch location out before we know for sure that we can serve customers and workers.

But that's what we're researching now and that's what we are working on is how we can have a farther reach for the current customers we serve and possibly not do it from as many branches. That is one slight angle. The other is is we're talking about 5%-plus organic growth. That's a lot of new workers every day, every month that we are putting out and how can we extend the region, not open more offices with this kind of growth. So there is two angles. One is make sure we are running the current operation efficient and let's be ready to place all kinds of workers with a stronger reach. The goals are working. It's being grasped. It is a new process and new technology so it has it's hits and misses but we sure have some early adopters out there that are setting a pretty good standard for us.

Thanks. I promise the last one. Derrek, is there anything in the guidance for mobile in the fourth quarter? Thank you.

I'm sorry, Paul, could you repeat that?

Is there anything in the fourth quarter revenue guidance for mobile?

Yes. Yes. Our guidance is all in with everything that we've got rolled out technology-wise and business-wise right now.

Can you size it? Is it one or two points to the growth or?

That's a hard question, Paul because there is so many tools that we give our employees on a daily basis. They are going through various ends of recruiting, training, sales training, service training, we give this mobile app, there's a handful of other things that we are doing and to call out and say well the above, we are growing at 7% right now and we know that two points of that is due to this one component. It's too hard to slice it to say why because we just don't track it that way. What is the reason that we were able to place those workers? It's just a handful of initiatives that we've worked on and if we can maintain 5%-plus, 7%, like 7% but 5%-plus organic growth, we are going in the right direction.

Thank you very much.

(Operator Instructions )

Sara Gubins, Bank of America, Merrill Lynch.

Could you give us the branch count including the newly acquired Work Connection branches?

Hi, Sara. I sure can. So at the end of the third quarter, we had 589 branches and The Work Connection acquisition added another 37 to that.

Okay. Were there any further MDT clients that you exited during the third quarter?

Nothing to call out. I would say as we've got into the second quarter, a large part of our integration, anything that was a big kind of call out or big focus area we had worked through and that part of the business is part of our ongoing business and managing.

Okay. Any sense of the rough magnitude to the delayed starts to the energy project?

Let me go back to one other thing here, Sara, I just was informed I quoted the wrong branch count. I quoted 589 which is our Labor Ready branch count. Let me give you the correct all end branch count number, which is 725 branches at the end of the third quarter plus the 37 then that we added with The Work Connection acquisition.

Okay. The magnitude of some of the delayed starts of the energy projects that you mentioned in the quarter, any sense of it?

It's really what brought us under our -- the midpoint of our guidance, you could maybe call it $40 million.

They are back on track, Sara. It's just a delay and it happened in July. It's not that there's a delay here at the end of the quarter that we are trying to figure out. It was something that happened earlier in the quarter.

Got it. Okay. And then last, give me sense of the slack that's in your construction customer base? I'm wondering if they are pretty well staffed for current demand and that you need to see a pickup in new home starts to really seek growth and that end market on the residential side?

Yes. We need to see construction activity pick up but there's no doubt about that. In addition to that, we are seeing all types of customers, not just construction turn to us for a higher degree and a higher percentage of their employees. That's a trend in this whether it be to further regulation or it has to do with their uncertainty about their own business. Those two drivers, uncertainty about what holds for them, will it maintain, and regulation are key significant underlying drivers for our industry and for us specifically. Do we know exactly? Do we have a system that tracks open orders or lag for customer by customer, and we don't.

In our on-demand business where we are taking a lot of project orders, that's a lot of last-minute phone calls that we receive so we don't have a backlog of we really know and our captive to the demand of our customers. Although we stay close to them and we have a customer relationship management systems that track that pipeline, there are just not strong enough formula there for us to project off of. That's the beauty of an on-demand business and it's the challenge of an on-demand business is that, but we do know that those two key drivers in our industry are key and we do -- it's more than just stories. We see that happening day in and day out that their uncertainty and their regulation they face are turning them towards our industry and us specifically.

Thank you.

Randy Reece, Avondale Partners.

Good afternoon. As you contemplate acquisitions going forward, do you have any different priorities as far as footprint versus maybe occupational mix and are there differences in let's say the going prices in the marketplace?

Yes, that's a great question and so our historical mix of what we've worked on the last five to seven years, in the beginning it was more of a mix of occupational mix so new capabilities we will call it that we wanted to buy a recruiting engine to do drivers, one to do more skilled trades, one to do aviation mechanics, and that was the high focus of what we were working on. Most recently, it's been geographic expansion so we now have some key platforms that serve customers well. We have proven it out that it can be profitable and now we want to expand into new geographies, so we have two methods to do that -- hire our own sales and recruiters and put them in those markets or buy a customer list from an existing business that's been up and established.

We have found it's better return to buy. If you can't buy for the right price, we will go ahead and build and we'll throw some recruiters and build from the ground up. What's that population look like of expanding the current skill sets we have into new geographies is what we are looking at, and so it has to do with the geographic expansion is probably the lead there, Randy. However, with that there are a few situations where we are still looking to expand our ability to recruit various type of workers. Blue-collar occupations that we currently don't put to work, whether that be in a given skill or a given industry that they use a certain type of blue-collar or even hourly type worker, both are on our radar. Both are definitely on our radar. It's more of a 50/50 mix right now though than it was early on.

If you were to characterize customers' behavior versus your mark-ups when you're negotiating price, would you say they are behaving -- where in the spectrum of tough times versus good times would you say they are behaving?

Yes. Well, we are definitely in an environment where we can expand revenue and gross margins in the same environment so that would be an indicator. The result of an environment that is allow us to at least have the conversation and it has also given us the opportunity to say well if the gross margin is too low, I think we can put those workers in a higher margin situation and the supply and demand of given skill sets, whether that be drivers or that be electricians or go down the skill sets. If there's short supply, it's time to get the best price for what we have. So that is the environment that we are in, Randy, is that at least we're having the conversation and we are moving the needle.

Some of it is releasing clients and some of it is getting a slight increase but it is not a free-for-all. There's a lot of respect that goes on between us and our customers to say let's make sure we both win in this situation. We will go find you the high quality people at the speed that you need them and provide the proper service. We will respect your business, you respect ours. I think it is moderate is where I would put it right now but that's -- we will take that. We will take that moderate environment right now.

Very good. Thank you very much.

Josh Vogel, Sidoti & Company.

Your comments earlier about you're seeing a reduced dependency on your branches so not including the 37 from TWC, I'm just curious if had a strategy or timeline in place to eliminate any existing branches and can you also comment on any specific geographies where you are maybe seeing better traction with mobile?

Yes. The second one on it, are there certain geographies that have better traction and the answer is no. There are certain people that have better traction with it and I will put them in the early adopter category. Some that were -- they just feel more comfortable with technology, they were more ready for technology, and so that is encouraging for us that it's really a training issue. Some are willing to self train and jump in early. Others are going to need more encouragement and so we still have a nice bit of runway ahead of us to keep getting results out of that. Help me again with that first part of that question?

Sure, you were just talking about with the move towards more technology that you're seeing a reduced dependency on branches so I was curious if we should start to see your total branch count come down.

Sorry about that. Yes. This quarter alone, we closed 14 branches and the reason behind those 14 is someone else, those customers and workers can be served from a different location. One thing we're doing is we're ensuring that we don't miss any service opportunities, that customers can still be served in the time that they expect, workers still have access to use this. There are still certain needs that are physical, whether we need to do some evaluation or some training or some situational communication. So it's an ongoing testing those boundaries, Josh, and how we move this forward.

Long term, that dependency reduction comes in two forms. One, can we keep growing our organic revenue and our on-demand work which is that quick fill, can that grow without opening new locations to find workers. That will be one success metric. The other is can we continue to consolidate our locations in a manner where we do not lose any revenue or any opportunity to serve a group of workers. Both of those are important to us.

All right. Okay. And can remind me of the seasonality in the light industrial work, notably with regard to TWC?

As far as how it would move from like the third quarter to the fourth quarter? Or just the year end overall?

Yes, year overall and specifically third to fourth quarter.

Yes, I would say that that business is going to move like our -- traditionally like our Spartan Staffing business would or you would find another light industrial actually from another third quarter to the fourth quarter, it actually picks up a bit coming in the holidays and then falls off. And so from a revenue perspective, it is relatively close to the third quarter whereas the rest of our business kind of slopes down as we move out of some construction business. From third to fourth quarter, that revenue holds up fairly well.

Okay. Thank you very much.

Mark Marcon, Robert W. Baird.

With regards to the mobility roll out, can you talk about any sort of impact that you are saying with regards to some of the workers that you placed out on assignment in terms of their willingness to work through you more often after that is deployed? How is that going?

Yes. So from the worker perspective, yes, we are seeing several stories and the metric growing of the average hours that a worker works for us is increasing. Just recently, I was reviewing a story with a branch manager where one worker was tied to one branch and that's all they could do and now they have made themselves available to three different branches. It's a larger market but that worker is willing to take the transportation it takes to ensure that they're working every day not just when the one branch can keep them busy.

From that worker's perspective, he's thrilled. I'm making more money now with this technology in play and I'm able to grab job a lot more regularly. That's pretty powerful in itself. Again, it's back to the story of extending the reach for both the worker and then ensuring the timeliness to the customer site doesn't go down. And we've told stories here on this investor call in the past of customers that are shocked at how fast workers are showing up now, and it's really a more prepared workforce also because we are expanding how many different types of workers and actually the populations and demographics of workers that we can reach into. When you're dependent on one branch for your workforce, you're dependent on those that live within a couple miles of that branch and now we're finding that that dependency that I live within 2 or 3 miles of the branch even matters.

Yes, they need to come and get signed up and be evaluated and visit the location periodically, yet the distance to the branch doesn't matter. What matters most is the distance to the work. And so as we can judge and say well how close are you to the customer site, how fast can you get to the customer site, how well prepared are you to be engaged with that customer, those questions matter more than how close you live to the branch these days. That's pretty exciting.

Great. Any negatives with regards to maybe some people not being prepared to do the work and you are not able to eyeball them beforehand?

Well all of those concerns exist and so we are finding new innovative ways to ensure we are staying engaged with the workforce and we know how the customer feels about them. We've increased our -- actually our speed of communication with customers through this that they can actually tell us how the worker did and the worker completed their work and they are ready to be paid and the worker can communicate with us faster that they are actually safe, they had a safe experience that day with the customer, and we do all of that communication before the pay is done. We find that often that can be done within 20, 30 minutes of the job ending, either that shift or if they've chosen to be paid at the end of the week, collectively they get their pay pretty fast on Friday evening.

So all of those are -- there are enough positives outweighing that. Well, how do you do that evaluation and I was counting on seeing the eyeballs of that worker. And all of that is just a little bit outdated way of evaluation and we have, we have dipped into new methods and ways to manage this workforce without needing to physically inspect them before they go to the customer site. Yes, you know those that have been in our business a long time, this is quite a change. And we're asking our employees to step up and make that change with us so that they can actually work through this and become comfortable that there is a good experience.

It only takes a little bit and they find out how excited their workers are or engaged their customer is through this process and wow, then you have a champion for life in this employee of ours that they're willing to try it again and again and then the story spreads. We are going to work through this. Are we batting a thousand right now? The answer is no but the technology is in play, it's expanding, we are communicating, we are training, and we're driving metrics that matter to us down through the business.

Great. Steve, can you talk a little bit about like what percentage of the Labor Ready branches would you say are -- have adopted and are making really good progress where you would say gee, by next year this will be totally in place versus what percentage would probably need more training and what would you do exactly to increase the training?

Yes. I would just roughly say about one-third of our employees jumped on this real fast. The early adopters are out there having quite a bit of success with it. There's a third in the middle that have played with it. They haven't used it exactly the most productive but they are trainable, and we are working through it, and we are moving them forward. There's about a third that are lagging or maybe not as curious as they need to be about this new process and where we are going with this. So but in the first three months of this, I'm really excited about it. I think that that's not bad. I don't have an exact metric of how many hours that we've -- or how many dispatches but it's something that we can pay attention to and start sharing with you if it's driving results a different way.

Yes, we will have more success in 2014. You know this first adoption and these first closers that we've gone through and most importantly same-store sales, organic growth growing in excess of 5%, those are the indicators that matter most. Can we deliver more revenue with a lower cost base and hold gross margins? Those would be the most important indicators on a results basis and we have a little bit deeper dive that we follow each transaction on but that's how we know we're going to make progress long term.

Great. And you talk a little bit about what was the incremental spend to roll it out? And you know how we should think about that fading?

The capital cost of it is behind us and so you see that our capital expenditures were about $10 million so far to date and some of that was spent in 2012. The acquisition of Job Rooster was a big part of this. That was the largest part of the spend and then probably approximate over the last 18 months an approximate $5 million to $7 million of additional spend. So the capital costs are behind us and is there an increase in ongoing transactional costs? No, it's less than what a physical dispatch would take or a physical so the cost per cell should be dropping as a result of this transaction and we should be able to expand our reach with less branches.

Great and can you talk a little bit about the kind of the cross selling initiative? You are talking about co-branding or more of an emphasis on the TrueBlue brand and then being able to market to various verticals. Can you talk a little bit about how that's going?

Yes. So over the last 18 months, we've also been working on should be selling and servicing as TrueBlue and as we went out and visited with our largest customers and then a random sample of smaller customers, would you be willing to buy this cadre of services from one salesperson or one service person and the answer comes screaming back. It's not that we would be willing, that would make it easier. And so we have enough evidence on the table that that's what we need to do. This is actually a larger behavioral change than implementing the technology and the process change we've been talking about the last few minutes of blending our businesses now and removing the rules around the brand become a little bit more of a challenge for us because systems run this and cultures have run this and you start running into pricing and wage payments and those very stiff brand walls that had been up around how we both price to the customer and how we set pay rates for workers.

All of those cultural things and real business processes start clashing. So what we've done is we have stepped back a bit and we've taken a couple markets and we've blended the service teams and said help us work through this so we know how to do that better and that's actually going quite well. We've been at that for about a year and at the end of the year, if you went to that one market, you would see everybody wearing TrueBlue logos, carry TrueBlue cards, and you go to the office it's says TrueBlue on the outside and the inside and we are learning more each day about well what business rules didn't we iron out enough before we put you into that environment. But we are making progress and that's exciting.

In addition to that, we've taken our national sales team that sells to call it about 25% of our business, these large accounts and we've changed them all to TrueBlue. So they are approaching our customer from a TrueBlue standpoint. As a salesperson, they are very open with our customers and saying you know these workers will be recruited and placed through our various brands still while we are working through that service engine, but to have 25% of our revenue being approached by one salesperson is pretty exciting. In addition to that, as I talked in my earlier comments, we sell both nationally and at the local level. We do, as a part of this MDT transaction, they had a group of about 50 sellers, them most of them in the southeast. And we call them TrueBlue, and they sell for Labor Ready, for Spartan, and for CLP.

That comes with its challenges, yet we are learning. We are going to work through it. We are going to push through it and we are excited that these general sellers of TrueBlue services are learning and growing and now matching that up with the real service engine, the real recruiting engine is really on our plate. We have some significant movement happening. It's not 100% of our business but it's at least 25% of our business right now is moving that direction. And it's quite a cultural opportunity for us to move through that, Mark, but we are making progress and it makes sense when we succeed at that level. So we know we're doing the right thing.

It's good to hear. Thank you.

That concludes our Q&A portion. I would now like to turn the call back over to Mr. Steve Cooper.

Thank you. We appreciate your interest in our questions here today and being with us on this call. Everybody, have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day. ( End of transcript )