TrueBlue, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Greeting and welcome to the TrueBlue Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d like to turn the conference over to your host Mr. Derrek Gafford, CFO of TrueBlue. Thank you. You may begin.

[Derrek Gafford:]

Good afternoon, everyone, and welcome. I’m here with our CEO, Steve Cooper. Before we begin, I want to remind everyone that today’s earnings call and slide presentation will contain several forward-looking statements, all of which are subject to risks and uncertainties and we assume no obligation to update or revise any forward-looking statements. These risks and uncertainties some of which are described in today’s press release and in our SEC filings could cause actual results to differ materially from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. Please refer to the non-GAAP reconciliations on our website at www.trueblue.com under the Investor Relations section. Also, any comparisons made to other periods today are based on a comparison to the same period in the prior year unless otherwise stated. As we discussed in October, our fiscal 2016 fourth quarter includes a 14th week, and we moved the quarter ending date forward two days from January to Sunday, January 1, to better align with the workweek of our customers. To facilitate comparison with prior periods and with the outlook we previously provided on a 13-week comparable basis, we’ll be referencing both GAAP and comparable 13 and 52-week results. We will use the term GAAP for generally accepted accounting principles when referring to the 14th week or 53-week results ending January 1, and the term comparable when referring to the 13-week and 52-week results. Due to the previously announced reduction in the use of our services by our largest customer, Amazon, we will also be providing comparable results excluding this customer. We believe, both sets of comparable results are complementary to our GAAP results and helpful in understanding the underlying trends in our business. The revenue for the nine additional billing days was $34 million. However, since this is one of our lowest revenue weeks of the year, the gross profit dollars produced during this period are more than offset by operating expenses, resulting in an operating loss of approximately $1 million for the nine-day period. Any reference made during this call to a comparable 13 or 52-week set of results, exclude the nine additional billing days. We made several changes in our reporting this quarter to enhance the transparency for investors. As we announced in October, we transitioned to three go-to-market brands during the fourth quarter of 2016. As a result, we are now reporting our results in three segments versus our prior approach of two segments. Our previous Staffing Services segment is now divided into two segments; PeopleReady, our branch-based staffing business comprised of the former Labor Ready, Spartan Staffing, and CLP brands; and PeopleManagement comprised of the current Staff Management, PlaneTechs, Centerline and SIMOS brands, which predominantly serve customers from a location base at the customers worksite. Results of our previous Managed Services segment, which was comprised of our recruitment process outsourcing and managed service provider businesses are now reported in our PeopleScout segment. We have also reduced the unallocated portion of our operating expenses, resulting an additional operating expense for each of the segments. The annual run rate of unallocated operating expense was about $35 million and is now about $25 million. This action coincides with changes made to our internal management reporting to increase the accountability and transparency of our operating expenses. Before I hand it over to Steve, I want to make you aware that we are no longer excluding processing fee expenses associated with the Work Opportunity Tax Credit from adjusted net income. So these expenses are necessary to produce a lower effective income tax rate, we believe it’s more reasonable to include these expenses in adjusted net income. However, these fees will continue to be excluded from adjusted EBITDA. Lastly, we have lowered the expected ongoing effective tax rate used in our adjusted net income calculation to 28% versus our previous rate of 32%. The new rate is a closer approximation to our results over the last four years and of our future expectation due to a higher yield on Work Opportunity Tax Credits. Please note that we have reached out all non-GAAP and segment information for all prior quarters and years back to 2014 on our website to ensure you have comparable results. Okay. I’ll now turn the call over to Steve.

[Steven Cooper:]

Thank you, Derrek, and good afternoon, everyone. Our earlier expectation was that revenue trends would worsen during the fourth quarter, given the strong prior year performance in Q4. However, due to strong momentum across all business segments and PeopleReady, in particular, we exceeded the outlook we provided in October. We’re also pleased to report that the comparable monthly organic revenue trends, excluding the loss of revenue from Amazon showed consistent improvement. The improvement was largely driven by PeopleReady, our branch-based industrial staffing business and was widespread across most all geographies and across all business sizes, including our large national customers. Our comparable 13-week revenue, excluding results from Amazon grew by 5% compared to the prior year. We’re also pleased to have maintained strong adjusted EBITDA margins, despite the decline in the total revenue. Our adjusted EBITDA margin on a comparable basis was up 5.8%. It was at 5.8%, up 10 basis points over the same period last year. We continue to emphasize disciplined pricing to optimize our bill and pay rate spreads. And we continue to focus on containing costs across all business units, along with driving synergies in our acquired businesses in order to keep the momentum of improving our EBITDA margins, which remains very important to us. Our acquisitions are performing better than our original expectations. We acquired SIMOS at the end of 2015 and Aon Hewitt’s RPO service line at the beginning of 2016. We’re pleased – we’ve been pleased that these acquisitions have exceeded expectations from a profitability, customer retention, and employee retention perspective. Commencing with the fourth quarter, we are now reporting on our business as three distinct segments

[Derrek Gafford:]

Thank you, Steve. I’ll start off by covering the results on a GAAP 14-week basis and follow-up with a summary of our key results on a comparable 13-week basis, followed by a supporting discussion of our operating trends. I’ll follow-up with a discussion on our three segments and finish off with an update on our liquidity position before I share our outlook for the first quarter. On a GAAP basis, revenue for the fiscal fourth quarter declined by 9% and net income was $18 million, or $0.43 a share. Our results for the quarter boiled down to this. We posted stronger than expected bottom line results, driven by higher than expected revenue. On a comparable 13-week basis, adjusted EBITDA and net income per share of $41 million and $0.58, respectively, led to high-end of the comparable 13-week outlook provided in October. Comparable 13-week revenue was $702 million, which exceeded the high-end of our comparable outlook of $686 million provided in October. The better than expected revenue performance was the result of two factors. One, improving comparable organic revenue trends, excluding Amazon, which were as follows

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Randy Reece from Avondale Partners. Please go ahead.

[Randle Reece:]

Good afternoon.

[Steven Cooper:]

Hi, Randy.

[Randle Reece:]

I wanted to discuss and get a little better understanding of – you’re going from – it looks like comparable revenue growth in the mid single digits in the fourth quarter and then the guidance is for year-over-year decline in the first quarter. I’d like to get some components of the underlying trends representing that change?

[Steven Cooper:]

Yes. Thank you for that. The growth in the comparable revenue was really driven by the acquisitions of SIMOS and Aon. On an organic basis, our results in Q3 and Q4 were about negative 3% and that’s about where we’re heading into the first quarter also.

[Randle Reece:]

Okay. So that’s a very similar trend. Do you sense any difference in how quickly the customers have restarted production – restarted operations in the beginning of the year compared with a year ago as you stacked through the holiday idleness?

[Steven Cooper:]

I understand that. Yes, that’s about the same a year ago. We’re not seeing a lot of environmental differences similar, yes, it’s very similar that the minimum wage increases always cause our PeopleReady group to hesitate a bit as they’re pushing through larger minimum wage increases and but that’s similar to year ago also. And so I think, as we closed out January, things are feeling very similar to a year ago.

[Randle Reece:]

So, the number of markets with minimum wage increases is comparable year-over-year?

[Derrek Gafford:]

Hi, Randy. I’d say that the number of market is comparable. It’s more concentrated in California this year compared to what we have seen in the past. So we’re starting off this year. California has a $0.50 pay increase for the state overall. But there is roughly just a little south, what’s called about 10 cities that have some pretty sizable increases from a $1 up to $2. So most of the pressure as far as getting our markup pass-through will be in the state of California early on. As you know, the challenge for us isn’t getting the cost pass-through, or necessarily the burden – the payroll tax burdens on costs. Our customers understand that they have that in their own businesses. It’s to keep our margin whole, at least, in the PeopleReady business. There’s a markup of about 40% put on top of that and that’s the challenge that we have in pushing these through. However, I will say that we are off to a good start here in January. As we look back at where we were last year in that PeopleReady group, we ended the first quarter with maybe about 50 basis points of gross margin compression, which we – we worked on really worked out a way of really well as we move through the year. As we take a look at our January results and how we’re doing right now, we’re at this point holding pretty flat with the prior year. So were also a really good start here. That’s also having and incorporated in our guidance here a little bit of pressure on the revenue side as well. There’s a bit of a trade-off particularly in that early days of minimum wage pass-through. And so most of the pressure of that as I talked about in California.

[Randle Reece:]

My last question is when I look at the impact of Amazon on the comparisons, does it affect any other segment and the PeopleManagement segment?

[Derrek Gafford:]

No, it’s all in the PeopleManagement segment.

[Randle Reece:]

Great. Thank you very much.

[Operator:]

[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to Mr. Cooper for any closing comments.

[Steven Cooper:]

Well, thank you. We appreciate you joining us today to hear the explanations of our operating results of Q4, and most importantly, this longer-term strategies that we’re working on that we’ve talked about here today. We look forward to updating you as we get to the end of Q1. Thank you.

[Operator:]

This conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.