TrueBlue Inc (TBI) 2016 Q3 法說會逐字稿

Good afternoon. My name is Chantel and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2016 TrueBlue earnings conference call.

(Operator Instructions)

Derrek Gafford, CFO of TrueBlue, you may begin your conference.

Good afternoon, everyone. Here with me is CEO Steve Cooper.

Before I begin, I want to remind everyone that any forward-looking statements made by Management during today's call are subject to the Safe Harbor statements found in TrueBlue's press release and SEC filings, and speak only as of the date on which they are made. We assume no obligation to update or revise any forward-looking statements.

The Company's third-quarter earnings release and related financial information are available on TrueBlue's website at www.trueblue.com under the investor relations section. This call is being recorded, and a replay will be available on the Company's website.

The discussion today contains non-GAAP measurements including EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per share. EBITDA excludes from net income interest, taxes, depreciation and amortization. Adjusted EBITDA further excludes from EBITDA costs related to acquisitions and integration, goodwill and intangible asset impairment charges, other charges and work opportunity tax credit processing fees. Adjusted net income excludes from net income the adjustments noted in adjusted EBITDA except for depreciation, and adjust income taxes to the expected ongoing effective tax rate. Adjusted net income and diluted shares are used to calculate adjusted EPS.

These are key measures used by Management to assess performance, and in our opinion, enhance comparability and provide investors with useful insight into the underlying trends of the Business. Please refer to the non-GAAP reconciliations on our investor relations website for a complete perspective on both current and historical periods.

Any comparisons made today are based on a comparison to the same period in the prior year, unless stated otherwise. I'll now turn the call over to Steve.

Thank you, Derrek, and good afternoon, everyone. Today we announced results for the third quarter of 2016 with revenue growth of 2% and net income growth of 17%. Adjusted net income grew 17% to $0.70 per diluted share.

Our team delivered growth in revenue and net income this quarter, while sustaining a high level of service quality with our customers. Given the challenging environment with regard to growth, we have maintained a sharp focus on the pricing of our Business, and management of our operating expenses. Our expense management actions have been decisive and balanced as we remained committed to our long-term technology and growth strategies.

We are taking the right steps to preserve our profitability while maintaining our readiness to accelerate growth. This focus, along with the performance of our recent acquisitions, produced 70 basis points of adjusted EBITDA margin expansion this quarter compared to a year ago.

I will discuss five areas with you that had an impact on the results this quarter: first, the operating environment has been difficult; second, our disciplined approach to pricing and expense management; third, the status of our services with Amazon, our largest customer; fourth, changes to our branding structure; and fifth, the successful performance of our recent acquisitions.

First, the operating environment has been difficult, and negatively impacted the quarter. Our organic revenue, excluding Amazon, declined 3% in Q3. As the quarter developed, our organic revenue trends, excluding Amazon, worsened, with July being flat, August down 3%, and September down 5%.

National accounts have declined to a larger extent than our local accounts. Amazon and just a few other large accounts were the primary driver of the overall decline, whereas our local accounts remained close to flat compared to the prior-year same quarter.

We did have a large acquisition in our managed services segment which has created close to 60% growth there, along with our organic revenue in this segment growing mid-single digits. Adjusted EBITDA dollars and margins for managed services doubled as compared to prior year. Derrek will cover certain industry and geography trends with you in his remarks.

The second area of discussion: Our disciplined approach to pricing and expense management has positively impacted the quarter. The low- to no-growth economic environment, along with rising wage costs, have created some pressure on gross margins during 2016. We have remained disciplined on this front, and have continued to experience improving trends as the year has developed. Excluding the impact of acquisitions and sales mix, gross margin improved this quarter to be up 10 basis points as compared to the same quarter a year ago, whereas we had seen 50 basis points of degradation in Q1 earlier this year.

We have also taken several cost-reduction actions which have been decisive and balanced. Resources are continuously assessed on a market-by-market basis while remaining committed to our technology and long-term growth strategies. Excluding the additional expense from acquired businesses and unique costs during the quarter, organic expense was down 5%.

The third area of discussion, the status of our services with Amazon, our largest customer: Amazon has been a significant customer in our Staff Management brand, which provides on-premise staffing solutions. We have provided services in two aspects of Amazon's workforce, the first being large-scale fulfillment centers. Here we provide contingent labor throughout the year, with our primary value being to help the huge seasonal ramp from September to December. This service represented approximately 13% of our revenue in 2005. As discussed earlier this year, Amazon plans to in-source most of this work within the US, and we reduced our outlook accordingly at the end of the second quarter.

The second service we provide to Amazon is labor within their delivery stations. While this business only makes up $35 million of year-to-date revenue, it was expected to grow significantly. Although we have disclosed and forecast in our outlook that we would continue to be the provider for this part of Amazon's workforce, it has become evident, as part of a broader strategy to be more self-sufficient, that Amazon will be directly sourcing the workforce needs for these locations, and not requiring our services for the delivery stations. Derrick will provide with you more information on our historical and expected results related to our outlook for these services.

While this is clearly disappointing news, the profitability of this business has become a challenge, dropping from an adjusted EBITDA margin of over 7% last year to 4% this year. The revenue drop with this customer should not overshadow the success of our on-premise business and our Staff Management brand. Excluding the Amazon impact, revenue grew by 7% this quarter at Staff Management.

The fourth area of discussion, changes to our branding structure: We have recently announced the simplification of our go-to-market branding approach for our specialized staffing solutions. This is the culmination of efforts that have been under way for quite some time. The dynamics in the marketplace have been changing, and businesses have come to expect our service capability to broaden in each and every brand.

Customers want our services to deliver an increasingly wide range of talent. We have had three brands that all deliver specialized yet similar talent and labor solutions. And many times we have multiple brands calling on the same customers, creating overlapping operating costs for us and frustration on the customer's part to have to deal with three different teams. We are streamlining our three branch-based staffing brands, Labor Ready, CLP, and Spartan, into one brand, PeopleReady.

As previously disclosed, we have been working on this consolidation for quite some time to ensure that the following things happen: our services expand as a result of this combination; our customers, and the workforce we place and manage each day, do not miss a beat; and our customers find it easier to do business with us and are ultimately able to rely on PeopleReady for even more services. Our expenses this quarter include a $4 million non-cash intangible asset impairment related to the write-off of CLP and Spartan brand names, and a $2 million write-off of branch signage associated with dissolving the brand names.

Earlier this year we rebranded all of our RPO businesses into the PeopleScout brand. This now provides us with two strong brands of PeopleReady and PeopleScout.

The fifth and final discussion area, the successful performance of our recent acquisitions: At the end of 2015 we acquired SIMOS, and at the beginning of 2016 we acquired Aon Hewitt's RPO service line. These two recent acquisitions are on pace to exceed our original EBITDA expectations. We now expect these two acquisitions to generate approximately $33 million of EBITDA as compared to our earlier expectation of $26 million.

SIMOS has been a great addition to our workforce management solutions. SIMOS's unique productivity model delivers a strong value proposition for the clients, and we have seen outstanding employee and client retention since the acquisition. We have also seen nice expansion of the service, and we are excited about continuing to build on the success of this growth.

Likewise, we have been very pleased with the performance of our Aon Hewitt RPO service line acquisition. The integration into our PeopleScout brand has gone very well and is nearly complete. We are excited about the continued growth prospects domestically, as well as furthering our international growth plan to drive business growth in our RPO solutions.

We maintain our commitment on being the best at industrial staffing and recruitment process outsourcing, which makes it easier for our customers to adjust their workforces in response to changing economic conditions. Although we have seen a recent slowdown in our results, we remain optimistic, as this is the very value we bring to our customers: the ability for them to flex their business growth and strategies no matter what point in a business cycle they might be. We can help them ramp up quickly in periods of growth, and help them control their costs quickly and shift their workforce in times such as this.

We remain very excited about the future, and understand what it takes to succeed in all different types of market conditions. I'll now turn the call over to our CFO, Derrek Gafford, for further details on our Q3 results and our fourth-quarter outlook. Derrek.

Thanks, Steve. I'll begin with an overview of our financial results for the quarter and then add some color on our operating performance by segment. I'll then discuss our liquidity position, outline our financial outlook, and finish off by covering our acquisition and capital management strategies.

Total revenue increased by 2% and organic revenue declined by 6%, or a decline of 3% excluding Amazon. Net income grew by 17% and adjusted EBITDA improved by 12%.

I want to provide some color up front on the revenue and EBITDA contribution from Amazon. First, in regard to the delivery business we exited in Q3, year-to-date revenue for that business is about $35 million with $3 million of start-up losses.

Second, I will provide a total revenue and an EBITDA set of trends for this customer. In 2015, revenue was $355 million and EBITDA was $24 million. Revenue for 2016 is expected to be $165 million. And excluding $2 million of costs associated with the exit of the delivery business, 2016 EBITDA is expected to be $7 million.

Looking forward, the annual run rate is expected to be about $30 million of revenue or 1% of total Company revenue, and $2 million of EBITDA. Additional details, including quarterly data, can be found in our earnings release deck issued today.

While we continue to pursue large customer opportunities, the Amazon relationship was an isolated concentration of revenue. Our next three largest customers each represent 2% of total Company revenue, and none of our remaining customers represent more than 1% of total Company revenue.

Turning back to quarterly results, total revenue of $697 million was below the bottom end of our expectation. Organic results, excluding Amazon, for July were flat and in line with expectation. August results declined by 3%, and September further softened to a decline of 5%. The lower-than-expected revenue offset by better gross margin and expense results produced adjusted net income per share of $0.70, which was $0.03 below the bottom end of our expectations.

Gross margin was up 90 basis points with the improvement roughly split between a favorable impact of acquisitions that carry a higher gross margin than the legacy business and favorable changes in sales mix within the organic business. Put another way, excluding acquisitions and mix, fundamental gross margin was roughly flat compared to Q3 last year, which is a marked improvement from Q1 this year when fundamental gross margin was down 50 basis points.

Operating expenses were up $10 million, which includes $11 million of ongoing operating expense from acquired businesses and $5 million of expense associated with fixed-asset write-offs related to branding change, exit costs associated with the Amazon delivery business, and planned integration costs associated with the RPO business acquired in Q1 this year. Excluding the $16 million of expense, operating expense dropped by $6 million, or a decline of about 5%.

Reflected on a separate line item in the statement of operations is a non-cash intangible asset impairment charge of $4 million from the write-off of the CLP and Spartan trade names associated with the branding transition. The effective income tax rate was 13%, lower than our expected ongoing rate of 32%, due to a higher yield on prior-year work opportunity tax credits.

Next I'll provide some background on the operating performance of our segments. Revenue for staffing services was down 1%. On an organic basis, revenue was down 7%, or down 3% excluding Amazon.

Revenue trends moderated across most lines of business. Residential construction grew in the mid-teens, with non-residential construction experiencing a mid-single-digit decline.

Excluding Amazon, retail revenue was down about 10%, consistent with the trend in Q2. Transportation was down high-single digit, and manufacturing down low-single digit, both of which were roughly consistent with the trend in Q2 this year.

Revenue from customers in service-based industries was slightly negative versus high single-digit growth in Q2 this year. Adjusted EBITDA was down 7% and related margin was down 50 basis points, as the organic revenue decline slightly outpaced the decline in operating expense.

Turning to managed services, total revenue grew over 60%, led by the additional revenue from the RPO acquisition completed earlier this year. Organic revenue also grew, and grew at a pace of 5%, which was the net result of two underlying trends. Existing customer volume declined from a tighter pace of hiring activity, but was more than offset by new deal volume.

We believe the current environment provides net revenue growth opportunities from competitive takeaways and new first-time RPO customers. But we also expect lumpiness in quarterly trends due to the smaller customer base in this segment in comparison with the staffing services segment.

Adjusted EBITDA and related margin both doubled. The growth was the result of customer pricing and cost improvements made within the legacy business this year, as well as the acquisition of the Aon Hewitt RPO business and related synergies.

Our balance sheet remains strong, given our solid cash flow and moderate level of debt. Year-to-date cash flow from operations was $213 million, or $93 million more than the same period last year, enabling us to make great progress in reducing debt. Debt to total capital dropped from 31% in Q4 2015 to 21% in Q3 this year, putting our trailing adjusted EBITDA as a multiple of total debt at less than 1 turn.

For the fourth quarter, the outlook for total revenue growth on a 13-week basis is a decline of 15% to 17%. On an organic basis, excluding Amazon, the outlook is a decline of 5% to 8%, which is a deceleration from the 3% posted in Q3 this year, largely due to tougher prior-year comparisons in Q4 last year versus Q3 last year. To be more specific, organic revenue growth in Q4 last year, excluding Amazon, was 11% versus 6% in Q3 last year. But the comparison gets easier as we move into 2017, as the Q1 2016 comparison is 4%.

The outlook for net income is $17 million to $19 million, and for earnings per diluted share of $0.40 to $0.45, or $0.54 to $0.59 on an adjusted basis. The outlook for adjusted EBITDA is $38 million to $41 million, representing a drop of roughly 15%. Excluding Amazon, adjusted EBITDA is expected to be up about 5%.

Let's shift the discussion to our year end. We expect the extra nine days associated with the extra week this year and the plan change in our week-ending date to produce about $30 million of revenue. Since this is our lowest revenue volume week, the additional gross profit dollars are expected to be breakeven with the operating expense for this period. Additional details on the outlook for the fourth quarter, including our segments, can be found in our press release financials and earnings release deck filed today and posted on our website.

I will finish off here with a discussion on our acquisition and capital management strategies. Over the course of completing more than 20 acquisitions, we have developed a rigorous acquisition process which includes a disciplined return-on-investment methodology. Our return-on-investment threshold is 20%, which is comprised of our cost of capital at 12%, plus a risk premium of 8%.

Buying at smart valuation levels is an important part of the process. Our last two acquisitions were purchased at an average of less than 5 times forward EBITDA. We will continue to be opportunistic in this space, but we also recognize the current low-growth environment and necessity of a very disciplined approach.

Let me also share a few points on our capital strategy. Over the most recent years, capital has been deployed to fund accretive acquisitions. We have used a mix of cash and debt to fund this strategy, to boost return on equity while maintaining a debt-to-EBITDA multiple in the range of 1 to 2 turns.

Over the course of a full economic cycle, share buybacks remain an important part of our capital management strategy and have had a positive impact on our long-term returns on invested capital. Currently we have $35 million of stock buybacks authorized. We will continue to allocate capital to the opportunities that will generate the best return on invested capital.

Over our nearly 30-year history in the human capital space, we have developed a seasoned approach to manage the Business through various cycles. We are taking the right steps in a low-growth environment to preserve our profit margins while investing in strategies to help prepare the Business to outperform the market as higher levels of demand return.

That concludes our prepared comments. We can now open the call for questions.

(Operator Instructions)

Jeff Silber, BMO Capital Markets.

Thank you so much. I wanted to ask about the intra-quarter trends, the decelerating trends from July to September. There was a lot of anecdotal and economic data that actually showed things improved throughout the quarter. I know sometimes that data is misleading, but I'm wondering what you think happened specifically, especially compared to where we were at the beginning of the quarter. Thanks.

Yes. Those are gradual, but they were consistent going from flat to 5% organic fall-off. It is interesting, Jeff, when you compare it to economic data, the timing is not exact of when manufacturing jobs might take a downtick or an uptick and same with some of the construction job activity that happened during the quarter. But we definitely see it over time. It may be off by a couple weeks, it might be off by as much as a month.

But what is reflected in the temporary help numbers and especially our most industrial short-term project numbers happens quickly when those other numbers drop, our numbers drop. Again, there might be a two- or three-week lead-way or tail-off as those numbers move. They're not always exact.

And you specifically cited a weakness in the other national accounts besides Amazon. Can you give us a little bit more color what was going on there?

Yes. There were some fairly big projects in the fourth quarter that drove some of those numbers. And it started towards the tail end of the third quarter last year. That drove some of it, for sure.

But in general we have seen larger accounts being more cautious all of 2016. The hiring in small accounts still continued to be, not a brisk pace but an acceptable pace on small accounts. We have seen that both from our temporary help contingent jobs that we place but also in our RPO space. Where we're doing the full-time hiring on our RPO space, we have seen those largest accounts reduce their orders, starting really in the fourth quarter of 2015. Thank goodness there is enough companies still shifting to RPO, it's driving new customer growth. But the existing customer growth, especially on those large accounts, has fallen off a bit.

So it is kind of that part of the cycle where the large companies are tightening first. They have held back on their own hiring and they have held back on some of their temporaries. We have not seen large layoffs yet but we've definitely seen some cautionary tales or signs in the largest customers.

One more quick one. I know it is still early in October, but can you discuss what has happened so far in October. Thanks.

Yes. Month-to-date results through October is included in our guidance, excluding Amazon. That decline has picked up to about 7%, so a couple extra points.

However, there our comp moving from -- or prior-year comparison moving from September to October got 3 points worse. So that is not to be expected, actually, as we take a look at seasonal trends, stripping away the percentages that I have shared with you. We were actually performing a bit better than we'd expected once we ended September. It is still early on. That is just three weeks of data, that gives you a little bit of color.

All right, appreciate the help. Thanks so much.

Sara Gubins, Bank of America.

Hi, thank you, good afternoon. Do you think that the trends that you are seeing, excluding Amazon, are really all cycle-related? Or are you seeing any strategic or structural or competitive changes in any of your end markets?

Yes, I think it is definitely cycle-related. As I just mentioned talking to Jeff, that we have seen it mostly with our large accounts first. Maybe they are planning further in the future and they send the signal earlier than small accounts. But there has definitely been a slowing from over the last four quarters in large accounts from the fourth quarter through what we've just reported here in the third quarter.

At the same time, smaller accounts are plugging away fairly good. And small to medium businesses are doing better than the large ones as far as using more contingent labor.

As far as are the end markets deteriorating? I think it is so hard to tell, there is so much mixed data in what's going on. We serve so many projects that approximately half of our downturn is a project ended and our client did not pick up a new project. Whether that is opening stores or closing stores on the retail front or some of the energy projects that come and go, we have seen projects end and the new next project just did not start. It is hard to bleed in and wonder or know for sure whether that is cycle-driven, Sarah, or whether that is just some other factors in their business.

Okay. And could you remind us of your business, how much is focused, from a revenue perspective, how much is large company versus smaller?

Yes, I'll give that information to you, here. So if we take our business again, and split it up between large and small, it is about half and half. Half large, half small customers. The mix changes a little bit in our branch-based business, it would be more towards small-sized customers.

I'll just remind everybody here, for somebody to make it into the large customer account for us, it just needs to be someone with a geographic footprint that can be serviced nationally. We have a quite a few customers here in the $500,000 to $1 million range that we would actually put in the large customer account. Maybe some others that you might follow in the industry, they would definitely consider that to be small- to medium-sized business. That's the split, about 50-50.

Okay, thanks very much.

Kevin McVeigh, Deutsche Bank.

Great, thanks.

I don't know if this is possible to do, but the guide looks like it is about $100 million miss relative to where the Street was. Derrek, if I heard it right, it seems like the runoff in Amazon is about $100 million relative to what you guys had initially -- the initial revision in terms of -- I thought it was going to be around $250 million, now you're coming in at $166 million.

Is this purely Amazon? And is some of this that retail affect you have been talking about on the remodel side as opposed to the cycle? Trying to understand that a little bit and my other question at a high level, why wouldn't have you guys pre-announce?

Okay. So a few questions in there. I'm going to take it in reverse order and then ask you a clarifying question here, Kevin. On the pre-announcement, we generally haven't done a pre-announcement. We don't set a precedence for this in setting an announcement. There's some that go other ways on that, but this wasn't a dramatic miss, certainly beneath the low part of our guidance.

Most importantly, when we announce our results, we want to be able to talk with you all about it and provide a lot of color and transparency around it. So that's basically our process.

Back to your question on the guide, could you repeat that? I was not quite certain if you were talking about our previous annual guidance, our Q4 guidance or Amazon.

The Q4 guide, if I pick it up right, it looks like the range is $670 million to $686 million. In the Q it was around $775 million. I thought maybe I am wrong, that you guys were modeling about $275 million in annualized revenue from Amazon and now it looks like that is coming in at about $166 million.

It is not one to one, but it looks like it's about $100 million adjustment to Amazon and that's the miss. Is that primarily that and some of the retail coming in? Or is it really the cycle turn? We're trying to figure that out. And then the Amazon, when did that come about? Because it seems like there has been a lot of moving parts around the contract.

Okay, thanks. I understand better now, Kevin. Let's talk about couple pieces on Amazon. I'll go down that track and I'm glad you asked. I'm going to provide even some more color here around Amazon because I think it will be helpful beyond what you've have asked.

In 2015 we did $355 million of revenue with Amazon. When we talked with you all at the beginning of the -- or at the end of our first-quarter and released our results and gave you news that they were going to be downsizing the use of our services in their fulfillment centers, at that time we said our best estimate for the year is $205 million of revenue. Okay?

So where it will shake out right now is about roughly $165 million. So that is a $40 million drop and most all of that is occurring in the fourth quarter. Part of that, call it maybe a third of that $40 million, is related to the delivery station business, which we got news on that during the mid part of the quarter. And so that has come out of our forecast.

And then the other two-thirds of that $40 million drop, let's call it $25 million, is related to the fulfillment centers. And that is just Amazon using less of our services for a variety of different reasons. You got about a $40 million adjustment for the annual amount that we gave you and all of that is really occurring here in the fourth quarter.

While we are on this topic, just to remind everybody, we gave a forecast next year, basically a run rate forecast, as it is now of about $30 million of revenue and $2 million of EBITDA. In our earnings release materials that we sent out today, you will see also we gave the revenue on a quarterly basis in there. So you can take this $165 million that I just mentioned and break it up by quarter.

But I also want to provide you with the EBITDA by quarter and I'm going to do that right now. I think it is helpful for you to have this and we want to make sure that we are as transparent as we can, because I know these kind of shifts can make it challenging in understanding where things are going.

So I'll give this to you by quarter here in 2016. First quarter of 2016 EBITDA was roughly $5 million. Q2 of 2016 was roughly flat. Q3 of 2016 was $1 million loss. And in Q4 of 2016 we are expecting about $2.5 million of EBITDA in the guidance that we gave you. As a point of comparison, Q4 of 2015 was about $11.5 million of EBITDA, so there's about $9 million of EBITDA overhang in Q4.

I think it is also important to give you -- well, I gave you what Q1 of 2016 was, that $5 million. So really what we have here -- you can do some of your own calculations here, but we've got a couple quarters here of overhang EBITDA-wise, until we get into the second quarter 2017. So let me pause there, Kevin. I think I got most of the Amazon question you asked and then some. Hopefully that hit the mark.

Yes, that was very helpful. Then my last one, I'll get back in. It looks like -- is it fair to say the lower tax rate helped earnings EPS by about $0.16? I think it was modeling around 32%. It looks like you came in at $0.13. Was there $0.16 of help on the tax rate?

You're talking on raw EPS, not our adjusted number, right? Because our adjusted number that we shared with you just keeps it at a flat 32%.

So the $0.70 is adjusted for the 32%.

Yes, that's right. The $0.70 that we reported today has our tax rate at a flat 32%. It doesn't have that benefit in there.

Got it. Thank you, Derrick. Thanks, Steve.

Randy Reece, Avondale Partners.

Good afternoon.

Hey, Randy.

I am in the same boat as everybody else, wondering about how do you isolate the weak spots in the business. Are there any geographic differences in your business trends? Is there any way you can identify regions that are any significantly different than the Company average in terms of the way they trended through the third quarter?

Yes, I hit it from mostly an industry vertical perspective and gave color there, Randy, because that was the best way to highlight some of the unique points. If we took a look at it by geography, I went through this and did some evaluation around it. For the most part, it was somewhat consistent, the trends that we saw.

I'll give some directional color here. The West Coast comparatively, if we are talking what is now versus what was Q1 and Q2, slightly weaker. The Midwest, probably somewhat that way, although the trend there, quite choppy. Same with the Northeast. Southeast and Southwest have been, all things considered, pretty resilient. That gives you a little bit of color from that perspective.

Our revenue miss that we had this quarter of roughly $25 million beneath the low end -- or that would be $25 million, actually, from about our midpoint, about $5 million of that was in CMOS. That was just new customer timing coming on; that acquisition's doing really well. They're still growing, call it high single-digit compared to 2015, so still growing quite nice.

The other $20 million was really in our branch-based staffing business, not our on-premise business, that came in as expected. And excluding Amazon, that business has been growing pretty nice. It still has been growing mid to high single-digit, really, all year long.

I think one of the underlying trends that we are seeing, really, in the business, whether it is our branch-based staffing business, whether it is on-premise, whether it's RPO, same customer revenue, it's just been sluggish. So where we are experiencing growth, it's from competitive take-aways, particularly in the staffing side on-premise. Same with RPO. Or in RPO because of new first-generation customers, meaning customers that have not used RPO before. But I think the underlying factor across all parts of the business is things have just been, on a same-customer basis, quite sluggish.

All right. The strategy to rebrand at this time, can you give me a sense of timing of how you are going to stage this out? And what it might cost next year?

Yes. This is something that we had been working on for quite some time, actually even before the Seaton transactions. We had our specialized staffing businesses to bring these together, mainly for that point that I mentioned earlier, that customers were getting a bit frustrated that TrueBlue had two or three different brands calling on them and offering services and looking like a competitor or not being clear.

We look at it from the lost opportunity where almost every customer can use all of those services. And when we approach it properly with the right service angle, we were right.

We have tested this in multiple markets. We have brought it together in stages. Some of very first stages were answering the question, can all of these services be sold together? And several years ago we started putting our sales force on this task and it has moved from a test basis to a full roll-out already where our salespeople that are out in the marketplace can sell Labor Ready, CLP and Spartan. That is not a difficult task.

The second question was to see, can we recruit these candidates from the same perspective. And that one was a bit tougher. We found out that the specialization within recruiting needed to be protected and taken care of a little more, even to the point where when we were going to go out as one brand, we were going to need to add more recruiters to be able to recruit these various skill sets and talent levels for clients. Even going back to a year ago when you heard us talking about adding more recruiters, it was really in preparation for this rebrand where we were going to be selling and operating as one.

The third question was, can we operate these three as one? The answer to that one is obviously yes. It is just a little more difficult because you got to change your systems out. So we've slowly been working on that the last three years with a heavy push here in 2016. We've taken some of our internal systems and made tweaks to them.

So what you see in our capital expense numbers is really what it has been taking. We have really hit our peak of bringing these together. It does not get more expensive from here. We have been buying new signage and stuff for the branches. You've really seen the peak of what it takes to bring this together.

The leadership teams have been operating for almost 2 years as one, where the same leader at the regional and market level have taken on these multi-brands and been running them anyway. So the largest impact here this quarter really has to do with moving the system and getting everybody using this new payroll and billing system that can bill and do the payroll and compliance for all three brands. That has been done, tested, rolled out.

There is about a six-month roll-out, though, to get every employee on that new system and get every customer being billed on that new system and getting every temporary associate paid on that system. So there will be about a six-month tell of that happening, but the expense does not ramp up from here.

As you can tell, it has been quite a process over several years of getting this to come to be. Where it is out and functioning well, we are seeing great results. We are seeing the opportunity to place more skilled employees where we were only selling general labor and vice versa. Where we have great skilled clients, we are able to sell more general labor. So the early signs, which have really been tested and played out the last three years, are coming true.

It's just taken that leap that we took this quarter, actually just a couple weeks ago, to flip the name legally and start putting the signs up, and really be in the marketplace as PeopleReady and have websites functioning well. That is really the big push this quarter and where we stand at this point in time.

Following up right behind this quickly, is the strategy to put this entire group of PeopleReady on a mobile app. You've heard me talk about that the last three years also, of the swing of the temporary associates having more smartphones in their pocket. We had invested heavily in WorkAlert, which is an SMS-based, texting-based solution that has been working very well the last four years.

What we noticed quickly after we invested in that system is more and more smartphones were becoming apparent for our workers. And we knew there would be a day that there would be more smartphones in their pockets than SMS phones and texting capabilities. So we have been prepping for that day and we are a long ways down the road. Actually 80 of our branches have an app up and running where the workers can choose their jobs from an app and soon-to-be that customers can order on this app. We are making great progress there and know that by the first half of 2017, we will have the entire PeopleReady organization up on this app in a new age.

That's going to open up a new type of worker for us. It's going to open up more availability of those that are willing to look on their phone for a worker, but not necessarily -- or excuse me, a worker looking for work, a job seeker looking for work on their phone, but wasn't willing to come into a branch looking for work. We have seen those numbers, and actually the diversity compared to our current worker base, change rapidly. The gender being highly now in our current base and 50-50 that women are looking for this opportunity to seek a job by using an app rather than coming to the branch. And the age demographic changes quickly also.

So we are excited about that. Now, that had to come together. You asked the question about PeopleReady and how long we've been working on that. It has been three or four years in the making and now we find the day we can do this. then we have to follow that up with a quick app so that brand gets all the power that we can get out of it.

(Operator Instructions)

Mark Marcon, R.W. Baird.

Hi, Steve; Hi, Derrick. First just a follow-up on that last one. Would you expect by Q3 that everything will be up and running in terms of the new brands? And what are you anticipating with regards to some of the legacy Labor Ready-type workers being distinct from the CLP type? How exactly do you do that?

You said Q3, did you mean Q4? Or did you mean Q3 of 2017?

Q3 of 2017.

Okay, yes, we will be completely rolled out by Q3 of 2017, for sure, with this branding. It's going quickly. Everybody has some of the branding up and running and there's just certain pockets that we're not recruiting skilled workers in. There are certain pockets we are not doing light industrial manufacturing or recruiting and we're just doing general labor. This is really more of an opportunity to expand our services into those pockets. And so the roll-out takes that long to get recruiters up and running in all markets.

The question of how do we segregate or keep the general laborer separate from the skilled, it really comes from our recruiting base. We're going to keep branches open and that is really more dependent on how the mobile app works and whether we have enough workers coming to us through the mobile app, not based on branding. So the fact that these offices are open and the old Labor Ready office will now be a recruiting center for general laborers under the PeopleReady name. And we'll keep as many of those recruiting centers open as we need to, to recruit that general labor until we know we are getting enough out of the mobile app.

As far as skilled workers, they are really recruited through a full-time recruiter, someone that builds a relationship with them and stays in contact with them and communicates when the job openings come to them. The skilled worker is not one that comes to the branch often. They used to, to pick up a paycheck or a time card, but we have taken care of that with other forms of technology. So the skilled worker is already being managed remotely, so they are not really being blended in with the general laborer right now. So it is really the old Labor Ready offices remaining open as recruiting centers for PeopleReady.

Okay, great. You said you would be done by the third quarter. Could it actually be done by the second quarter of 2017?

Yes. Really what we talking about done there is when they are using the combined system. That's what we are checking the box (multiple speakers).

And every branch being branded appropriately?

Yes. So yes, it could definitely be done by the end of June.

Okay, great. And then going to Amazon, the underlying reason why they decided to go a different way relative to what they previously indicated, was what? How did they describe it? What was different in terms of their new expectations relative to what they previously expected?

They not shared a lot with us. What we do know and what we have seen from being in meetings with then, it is part of a broader strategy to in-source many functions that they had previously outsourced, especially in regard to shipping and delivery, that they would have more control over that and not be subject to providers. Possibly to pick up some profit margin, not a lot there, as we've disclosed.

But the main thing, I think, is control and knowing that they are controlling their own processes more. So in-sourcing previous things, all the way to where they stand with UPS and FedEx and wanting to control delivery right to the customer.

So it is just part of a broader strategy that they have been implementing. And tested a few things here and there, but it went fairly quickly at the temporary labor aspect.

Do you sense that integrity is being similarly impacted?

Yes.

Okay. And then how does this influence how you are thinking about in terms of future sales efforts? For a number of quarters we have heard small- and medium-sized companies doing well, national is a little bit tougher. Does that shift how you are thinking about where to focus?

Well, when we came out of the big recession, we noticed large accounts were growing and we had a fairly big ramp-up that we had to do. We were not established well with a big salesforce and national account team that could handle the level of demand that we saw large customers dealing with. We really started getting on our feet with the Seaton acquisition because they handle large accounts so well on that on-premise business.

We often said during that ramp-up of large accounts in 2011 and 2012, though, we had not walked away from our ability to service small and medium businesses in the local market. We kept our branches open. We kept teams there. All those sales per employee had decreased and sales per branch had decreased. We stuck with that strategy.

So similar today, we are not losing customer account, what we are losing is purchasing dollars of each account. So the revenue per account is dropping but the number of accounts are not dropping. It is a bit of a challenge because we want to stay true to that strategy that we can take care of large accounts, and so we are going to stick with that strategy. We are not walking away.

Where you invest, and it's a little faster to ramp up or easier to ramp up and down the local market of hiring salespeople and hiring recruiters. On the aegis, it's not as easy on the large accounts because there's less people handling those accounts. Bottom line, it's staying focused on both, Mark.

Okay, great. Obviously everybody is going to be trying to come up with numbers for next year. As we think about -- it sounds like the expenses are not going to ramp up materially because of the rebranding. How should we think about what the run rate gross margin percentage would be? Obviously it's going to be impacted on a seasonal perspective, but as we think about losing the Amazon revenue and some other puts and takes, how should we think about that?

Yes well, we have not given any guidance for 2017. That's a tough one. Let's go this way, I think a good way to think about this is -- it's why I wanted to give you the Amazon numbers, is to give you the revenue and the EBITDA and understand this EBITDA overhang. So with the revenue and EBITDA numbers from Amazon, I think you should be able to work where you need to go, at least on an EBITDA basis, Mark.

I get that there is a lot of noise here on the gross margin line, but I would recommend you doing as you're taking a look at 2017, is remember what our comp drops to in Q1. Organic growth, excluding Amazon, our comp in Q4 of 2015 was 11% growth, which we're up against this Q4. And then in Q1 of 2017, it's up against a growth rate of 4%. So you can do your own extrapolation of where the business from a revenue perspective would grow, ex Amazon, with that, and project the revenue, ex Amazon. I think you could back into your EBITDA forecast with the little bit of math that I gave you today.

All right, thank you.

John Healy, Northcoast Research.

Thank you. Derrek, I wanted to ask a little bit more -- I hate doing this -- about the Amazon relationship. When you talked about the $2 million run rate of EBITDA going forward, does that assume any sort of what you say revenue -- cost absorption, by finding additional customers, or additional big customers? I remember a number of years ago when you guys had the Boeing transition, you kept a lot of the infrastructure in place and redeployed it. Does that $2 million assume some redeployment or is that an apples-to-apples number?

John, could you clarify what $2 million you're talking about right now?

I believe in the slides, you guys had a slide that talked about $2 million in EBITDA contribution run rate?

Oh yes.

I was assuming that meant $2 million of EBITDA contribution on a 2017 basis versus the $30 million in revenue you were talking about there.

Yes, so what we were basically saying is if you take the revenue that we would have ongoing with Amazon right now, and clear the deck, that is $30 million of revenue and $2 million of EBITDA. Put another way, if nothing changes in our relationship with Amazon, that is basically what we would be expecting for 2017.

Okay, that's fair. And then I wanted to ask the down 5% to down 8% organic growth that you guys are talking about. What would that look like on a pure placement basis? Would that be worse than that? Or are there some things with mix that are causing the revenue numbers to look different than the placement numbers?

Well, I don't have it broken out by placement, but the main thing that would be different between placements and the revenue number would be bill rates inflation. So probably a better way to think about it's maybe not placement but hours. We have been having bill rate inflation of about 4%. So whether you want to use placement or hours, that would be a factor you'd want to put into place in making your -- really, to answer your question.

Okay. And then last question, with the $2 million service relationship you guys have with the RPO business, when does that hit next year? Is that in the first half or the second half?

Say that one more time?

I think you guys had a $2 million benefit in 2016 from the shared service relationship with Hewitt. When does that fall off? Is that in the first half of next year or is that going to happen next year?

It's pretty evenly spread. What John is referring to is in our slides we've said how much of the RPO revenue will be this year and the EBITDA. EBITDA $17 million to $18 million. But there is a couple million dollars of windfall benefit in that from some favorable pricing from a transition services agreement that our costs of doing some of those services will be higher. So that $2 million will be roughly evenly split by quarter across 2017.

Okay, thank you, guys.

And I'm going to provide one other piece of information here that Mark asked on gross margin, about what our blended gross margin would be going forward. Probably the main piece of data to know here is what the gross margin for Amazon has been, and it has been roughly 15%. So we've given you our 2016 estimate for the Amazon revenue this year that will be in our results, roughly $160 million, $165 million of revenue. And that's coming in at a gross margin of about 15%. I think you can use that to do some back-out math to get to a new run rate.

There are no further questions at this time. I will now turn the call back over to Steve Cooper for closing remarks.

Thank you. We appreciate you being with us today and asking us these questions and showing the interest. We will update you towards the end of the fourth quarter on our results. Thank you.

This concludes today's conference call. You may now disconnect.