Q3 2019 Earnings Call
Please go ahead.
Good afternoon, everyone and thank you for joining today's call I'm here with our Chief Executive Officer, Patrick Burrell before we begin I want to remind everyone that today's call in slide presentation 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.
We use non-GAAP measures when presenting our financial results. We encourage you to review the non-GAAP reconciliations in today's earnings release or a trueblue dotcom under the Investor Relations section for complete understanding of these terms and their purpose any comparisons made today are based on a comparison of the same period in the prior year unless otherwise stated.
Lastly, we will be providing a copy of our prepared remarks on our website at the conclusion of today's call and a full transcript and audio replay will also be available soon after the call with that I'll turn call over to Patrick.
Thank you Derek and welcome everyone to today's call. We appreciate you joining us.
The strong execution drove better than expected topline and bottom line results this quarter.
While revenue growth has yet to return we were pleased to see monthly revenue trends were consistent during the quarter and we delivered another quarter of earnings growth Trueblue has been driving digital disruption within the staffing industry with our job stack in Inffinix offerings, and we continue to experienced favorable employee and customer adoption we remain.
Squarely focused on client expansion and retention disciplined cost management and investing in our digital strategies to differentiate our service offerings. We also announced today that our board of directors approved an additional $100 million of share repurchase our board remains highly supportive of our focus on opportunistically repurchasing shares and returning.
Now I'd like to update you on the financial results as strategic initiatives within each of our segments, starting with our largest segment peopleready people ready is a leading provider of on demand labor and skilled trades in the north American industrial staffing market and represent 62% of trailing 12 months' total company revenue.
59% of segment profit.
People are ready is revenue was down 4% during the quarter due to lower business activity across our client base growth at PV people ready was favorably impacted in Q3 by project work at one of our clients, creating a 2% year over year growth benefit.
Excluding the project work I, just mentioned underline monthly revenue transit Peopleready were consistent throughout the quarter consistent with our focus on managing costs across the business. We've been taking a hard look at peopleready its cost structure.
Since our last earnings call. We've taken cost actions that are expected to result in approximately $10 million of net annualized savings. It's important to note that these reductions were focused on mid level management and support positions and did not impact branch staff or sales resources, Derek will provide additional information, including the expected impact Q.
For in conjunction with our outlook as always our objective is to balance smart cost management with strategic investments to build our client base and drive growth. One example, we touched on last quarter is people ready is new client experience team.
This is a team of seasoned operational and sales leaders, who are dedicated to enhancing client satisfaction by proactively reaching out in the critical early days and helping clients move up the curve in terms of jobs deck usage, while the program is still in its infancy. The feedback from our branch based colleagues and our customers has been overwhelmingly positive.
The team has also helping us proactively drive more activity through our strategic cross selling program, which continues to drive revenue growth year over year for Trueblue, we have several customers where overall, we've uncovered millions of dollars an additional revenue our digital transformation via our job stack mobile App remains one of the most important strategic initiatives within piece.
Already our job stack mobile App is transforming the way we do business over the past several quarters, we've seen disproportionately high revenue growth from clients that are heavy users of jobs that we've been working hard to build the critical mass we need within the App and we're very pleased with the progress we've made on that front, we've deployed more than 1 million shifts via job stacked or.
In the quarter, representing a digital fill rate in excess of 40% up from approximately 30% as recently as the fourth quarter of 2018 associated adoption is now 87% and we have approximately 19000 clients using the app up from 13000 in December we also recently announced a new strategic relationship with Huber works.
Super works is separate and distinct from job stack and this new venture represents another step forward in our digital strategy for temporary staffing we were works as a platform that connects workers with businesses that need to fill available ships now while we were works has a great platform one area. They don't have experience as pain in managing W. Two employees Sue.
Her works turned to Trueblue for help.
We've created a new business venture called people works to serve as an employer and payroll service provider for workers booking jobs on the Huber works App. It's early days for the people works venture and we don't know yet if there will be a longer term material impact.
But it's clear that Google works choice to work with Trueblue is a testament to the strength of our payroll offering world class service and decades of expertise in on demand staffing turning to our next segment people management provides onsite workforce solutions in the North American industrial staffing market.
It offers compelling value and our a perfect fit for larger clients with longer duration strategic needs for contingent workers. This business represents 27% of trailing 12 month total company revenue.
And 10% of segment profit.
Revenue was down 12% roughly half of this decline is due to previously disclosed headwinds, namely the loss of Amazon's Canadian business and volume and price reductions at another retail clients. The remainder is due to less same customer demand due to lower activity levels within their own businesses. We're pleased with the strength of our year to date.
Business wins, which are up 20% over the same period last year turning to our last segment Peoplescout is a global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings and represents 11% of trailing 12 months total company revenue.
And 30% of segment profit revenue was down 9% overall, primarily due to previously disclosed headwinds.
Namely one client that was lost after being acquired and less volume and lower margins at another large account that was repriced to reflect a multiyear arrangement.
In spite of these recent headwinds we like the strength of our service offerings and are getting good traction. During Q3 Peoplescout was recognized as an enterprise ARPU leader and Ichiro today's 2019, Baker's dozen customer satisfaction rankings. Peoplescout was also ranked as a health care ARPU leader on this year's Survey addition.
Italy Peoplescout was identified by Nelsonhall is a leader in every category and their 2019 evaluation of the RPL marketplace. Our strategy for Peoplescout is unchanged and is aimed at capitalizing on our leadership position in the North American ARPU market to expand our global capabilities and differentiate our service offerings through technology Inffinix is our preferred.
Rytary next generation HR tool as improving our ability to compete in the marketplace. For example, and several recent winning sales pursuits RPL buyer shared with us that Inffinix was a clear differentiator and a key reason for peoplescout being selected Moreover, clients fully implemented on Inffinix are experiencing improve time to fill candidate flow and candidate.
Satisfaction summarizing our performance, we're executing on our three primary initiatives of putting our segments on a path towards sustainable growth managing our cost to enhance profitability and leveraging excess free cash flow to return capital to shareholders. These areas of focus along with our strategic use of technology, which is something that our clients are embracing regardless of the.
Ebbs and flows of their own businesses will help us captured the many opportunities ahead in the changing world of work I'll now pass the call over to Derek who will share greater detail around our financial results.
Thank you Patrick.
Revenue was 637 million was at the high end of our 613 to 638 million outlook.
Better performance was driven by $11 million benefit from project work with one client that was not anticipated in our Q3 outlook total revenue was down 6%, which was larger than the decline in Q2 of 4% due to the anniversary of the GMP acquisition in Q2 organic revenue was down 6%, which was consistent with the <expletive> .
Line in Q2 of this year.
Excluding the project previously mentioned monthly revenue trends were consistent during the quarter turning to the bottom line net income per diluted share 68 cents exceeded the high end, our 50 to 60 cents outlook and adjusted net income per diluted share of 76 cents also exceeded the high end of our 60 171 cents outlook EPS was up 11.
Percent and adjusted EPS was down 4% on top of strong EPS and adjusted EPS growth in Q3 last year up 20% and 32% respectively. The better than expected EPS and adjusted EPS results were primarily due to the revenue beat and a variety of cost management actions.
In addition, the effective income tax rate for the quarter up 10% was below our 14% expected rate due to additional work opportunity tax credits gross margin of 26.6% was down 50 basis points, primarily due to higher workers compensation expense and the previously disclosed headwind at Peoplescout workers' compensation expense as a percent.
It is revenue this quarter was consistent with Q2 this year the higher than Q3 last year SDN expense was down 14 million 3 million of which is due to lower adjusted EBITDA exclusions and the remainder due to a variety of cost management actions as DNA was down 10% and SDMA as a percentage of revenue was down 80 basis points, excluding adjusted EBITDA of Fusions SDMA was down.
8% or 30 basis points. We've also taken a number of action to reduce operating costs in the future. This will produce 2 million of benefit in Q4 offset by a charge of 2 million, which will be excluded from adjusted net income and adjusted EBITDA. These actions are also expected to provide a $11 million benefit in 2020 3 million of which we.
Plan to reinvest into customer acquisition and retention activities, resulting an 8 million of net benefit in 2020.
2019, we consistently discuss some revenue segment profit headwinds with our Peoplescout business.
Located with repricing of an account and the loss of a client that had been acquired by strategic buyer. Similarly in our people management business, we discuss the transition on the customer from our Cmos business doorstep management business and the diminishing impact of aloft Amazon again. This quarter. These items suppressed total company revenue by 15 million and adjusted EBITDA by 6 million.
Good EBITDA of $39.3 million was down 10% due to lower revenue and related margin was down 20 basis points as a result of lower gross margin.
During the quarter, we repurchased 22 million of common stock, bringing our year to date repurchases to 31 million, which represents about 90% of year to date free cash flow. This activity took the amount remaining under our 2017 authorization down to 27 million and we're pleased to announce today that our board of directors authorized an additional 100 million share buyback.
This authorization reflects our confidence in the long term outlook for business and our desire to continue to return capital to shareholders.
Turning to our segments people Revvy revenue was down, 4%, which was better than expected, but a step down from 2% decline in Q2 as discussed earlier revenue was favorably impacted by project work at one of our clients, creating $11 million benefit in comparison with our Q3 outlook. Excluding the project work underlying monthly revenue.
Hands when consistent throughout the quarter segment profit was down 1% people management revenue was down 12%, which was consistent with our expectation of a 12% decline five percentage points came from the previously disclosed customer headwinds and the remainder from lower same customer demand segment profit was down 45%, which included $2 million.
Or approximately 27 percentage points of decline from the headwinds previously discussed Peoplescout revenue was down 9%, which was also consistent with our expectation segment profit was down 14%, which is primarily associated with the previously discussed headwinds.
Turning to cash flow for the company year to date cash flow from operations totaled 53 million in capital expenditures were 18 million netting to free cash flow of 35 million overall strength of our balance sheet continues to improve total debt of $44 million down from 80 million at the end of 2018, and our debt to capital ratio, 7% on a trailing 12 month.
Uses our total debt to adjusted EBITDA multiple stands at zero point for turning to our outlook for the fourth quarter of 2019, we expect the revenue range of minus 10% to minus 6% the midpoint of the ranges two percentage points lower than the 6% decline posted in Q3, one percentage point of this step downs due to the roll off of some of the project.
The favorably impacted Q3 results the remaining stepped down as due to softening trends experienced in early October to step down occurred across most geographies and industries with notable softening within the construction vertical of our people ready business and in same customer demand trends within our people management business. We expect net income per share of 18.
20 cents or 35 to 45 cents on an adjusted basis, which assumes the share count at 38.4 million and an effective income tax rate a 14% the midpoint of our EPS guidance is the decline of about 40% versus growth of 11% in Q3. This year the drop in the trend is primarily due to a deceleration.
In the revenue trend I mentioned, a few moments ago and to a lesser extent lower gross margin and a lower decline in SGN expense. The lower gross margin is primarily due to the timing of payroll tax benefits, which were recognized throughout 2019 versus an annual true up in Q4 last year, we're expecting a lower declined in ESG.
<unk> expense in Q4 versus Q3, due impart to the anticipated charge in Q4 discussed earlier related to the additional cost reduction actions.
Lastly, I'd like to remind everyone that the work opportunity tax credit expires at the end of this year. While this program has been in existence for decades, and we expect this program to be renewed due to its appeal to both political parties. The timing can be lumpy that this program continued contributes about 10 to 12 percentage points of benefit to our effective income tax rate.
If it is not renewed we would expect an effective income tax rate of about 26% to 28% additional information on our outlook for the fourth quarter and certain annual assumptions can be found in today's earnings release debt, while some economic uncertainty exists. Our focus is clear we're seeing committed to our digital strategies. We believe we are leading the into.
Three and moving to a more digitally oriented business model the differentiate our services and acquire market share we plan to invest in customer acquisition and retention retention initiatives to not only acquire more business, but to ensure we come out strong when the economic climate improves. We also plan to stay diligent and managing our operating costs and lastly, we're committed to returning cash.
A little to shareholders through stock repurchases.
This concludes our prepared remarks, we'll now open the call for questions.
As a reminder to ask question you will need to press star one on your telephone.
Roger question cost about our hash key please standby ill legal barbecue and our roster.
Your first question comes from the line of Josh Vogel with Teradata and company. Please go ahead.
Thank you good afternoon guys.
My first question Derek you mentioned there was some roll off in Q4 from that large projects that.
People ready that contributed $11 million of additional revenue.
What do you what is your expectation for the contribution from this project in Q4, that's built into your guidance.
Yes, hi, Josh we expected to be about half that rate so the.
But that Rollouts contributed about one one point of of revenue headwind additional revenue headwind in Q4, because the roll off call. It.
$5 million to $6 million less in revenue.
Okay great.
So I know you continue to invest in digital strategies and for good reason and now that we're nearing the end of year I was just curious how you feel on this front end during 2020, how much more you planning to invest in these offerings if at all or do you feel the capabilities are fully their analysis about scaling them up further.
Hey, Josh this is Patrick.
A big part of our focus.
In the fourth quarter and in 2020 is too.
Leveraged the phenomenon that we've seen of clients that are heavy users of job stack we've seen.
Disproportionate growth.
For those clients that are using jobs that can heavyweight versus those that are using it in a moderate way or not using it at all so a big part of our investments in in Q4 in 2020 is around sales and marketing campaigns to target our existing client base.
To use the to a more because as I mentioned earlier, we've seen disproportionate growth in north of 20% year over year growth.
Those clients that are using it heavily heavily.
Also making some investments around the.
Acquisition of talent with the tool so we're going to be rolling out some new features in the first quarter.
We think are going to help.
Drive more candidate flow.
And we're looking at this from two ways both from a supply perspective.
And from a demand perspective, so those would be the areas of focus.
Just to put in perspective, some numbers for you as we think about 2020.
We finished the year when we will finished your somewhere around.
45% or so of our fill is coming into digital way. We think we can get that number closer to 55% by the end of 2020.
Well finished the year around 21000 clients on the tool.
We think we'll get closer to 30000.
By the end of 2020.
Ships will do around $4 million. So this year, we think we get that number north of 5 million. So these are some goals that we set for ourselves in terms of 2020 Mg and continuing progress on our on our digital strategy.
That's helpful. Thank you.
Just looking at.
Some of the you had a repricing of an accounted at Peoplescout and.
I was just curious are there any other notable are sizable clients, whether within peoplescout or maybe people management. We are currently engaged in or exploring similar type of repricing arrangements.
Well anytime a client comes up for renewal, there's conversations around repricing I wouldn't say there is any.
Outside the normal course of business, Josh So I wouldn't expect us to be making any announcements about.
A significant price concessions or price increases it will be more normal course of business.
Okay, great and if I could just sneak in one more.
Nice to see the cost reduction efforts that will result in I guess about 8 million in net annualized cost savings next year is that something that you think will be spread out evenly over the course of the year will be more backend heavy.
Hi, Josh it's Derek here, yes that will be relatively consistent through 2020.
Okay, great. Thank you for taking my questions.
Your next question comes from the line of Kevin Mcveigh with Credit Suisse. Please go ahead.
Great. Thank you Patrick.
Okay.
Great. Thanks, Kevin.
Thanks.
Fantastic Derrick.
One clarification.
11 million under the onetime revenue contemplated in the guidance.
To date or was it and that kind of comment.
For the guidance you've gotten issue.
That came in after the guidance was issued Kevin we're.
Our job just to run the business, we can based online any set of circumstances that are coming along economically and we set the guidance. That's what we know at that point in time and we've been doing of course, some analysis and had some ideas about some things that we wanted to do but really that were picked up after the.
The guidance was was issued.
Got it and is there any read a frame.
Everything went incremental margin on that would be higher or Wendy Kahn and consistent with what corporate averages overall.
Well give that to me one more time on become the cost cuts I am not falling on the margins we got the dollars.
I guess.
Just on the revenue Saturday, where the margins associated with that $11 million of revenue consistent with that.
On average in a quarter or was it kind of maybe a little bit higher given.
Got it.
The margin profile that revenue stream well you should think about it this way those cost savings it didnt come from variable cost reductions associated with revenue declines or anything like that.
That $11 million that we're talking about for 2020 by the way, we're going to be reinvesting three events. So we would deliver an 8 million of net.
Is.
It is our just cost reductions that we've made a crop broadly across the business now are maybe you're referring to the margin on the extra project work.
Yes, that's right there.
Okay, now that's well, it's a little bit above the average, but right at the Peopleready blended average.
For mental.
Standard incremental from for people ready mid teens.
Got it and then you said listen I apologize.
I was modeled on the call.
Hi line.
150 basis points of margin erosion, and then next quarter was that a function of the revenue or was that workers comp or is there a workers comp dynamic that maybe I just I didn't hear that if you could just refresh me on that.
Sure well, we are expecting the gross margin gross margin in Q3. This year versus Q3 last year was down 50 basis points, partly because of workers compensation and then partly because of the mix on some of these client headwinds that we've talked about.
As we go to Q4, we're expecting the year over year gross margin to be down about 80 basis points or a call that 30 basis points of more incremental.
Decline and that's largely tied with payroll taxes.
We had some some payroll tax benefit that we trued up at the end of 2018, and we have some more in 2019, we've been.
Realizing that benefit every quarter. So that's mostly timing on the gross margin then you got to the extra two points of revenue decline.
And the deleveraging that comes along with that and then on the DNA side.
We still have a nice SNA decline built in but it's not quite as large as what we had in Q3.
Somewhat because of the extra charge were taking on these cost savings.
That's in our guidance of of $2 million.
Helpful and Andrew.
Sounds like there was kind of a little bit of a step down in terms of.
Oh, one to 200 basis points.
You've seen that and I guess, just within the context jobs.
Good so much debate on the macro.
Does that actually did not feel more like kind of a traditional pause or something that's kind of Danish.
We need to little bit more.
You monitor.
Well I'll talk about this last us stepped down that we saw that we incorporate into guidance towards the end of my answer Kevin, but just to kind of re frame. The answer is kind of addressing your bigger picture question. This has been an interesting year, because we've seen really three step down this year, we saw one that the.
End of March and first week of April .
We saw one during the first couple of weeks of.
July and also in the first couple of weeks of October .
And what's been interesting about it is it's been both at our people ready business and in our people management business.
And we've really shows up in our same customer trends in our people management business.
So.
We don't think that we'd while we've only got room for improvement here, we don't think theres anything that we're doing different in the business model. So we really do you think this is macro driven.
When it comes around to how we run the business and look at that.
We're just going to continue to make the right adjustments as we see those step downs.
Our take with customers is that.
Everybody remembers the last recession, and it's not going up on everybody and there is watching these these economic signals very closely and trying to make real timely adjustments to the Workforces and we believe that's what we're experiencing in our trends as we as we look at the business.
In regard to your specific question about the most recent step down.
It was that to both at people ready and that people management.
Again people management same customer.
Demand trends.
No lost clients.
On the people ready side it was a fairly broad based across.
A variety of geographies and customer types and sizes. If you had to pick one though the stood out the most it would be in the construction area for people ready.
So I hope that give some some more color to our thoughts.
Super Helpful American interest like going I'll get back.
On the construction samples that kind of that.
Commercial line just does any of it may be you know and impact from GM and or borrowing that maybe comes back or do you think again this time there.
Yes, so phage it may be something that's ER and caring for Lady to warn Jade you know because obviously, there's a lot uncertainty out there you know as it did tonality I guess the conversations is it more you know something you think it's a little longer duration or something that again.
It's like again following you had a general motors you, obviously the tariff crosscurrents.
Is it any state specific or just pretty broad.
It's pretty broad in answer to construction it was both in residential and nonresidential.
But nonresidential has the biggest impact to a loss of our it makes up two thirds of our construction business.
In in thinking about how long is this and how does this carry itself on it's.
It's a really hard question to to answer Kevin I don't know is really the answer to that one.
There are a lot of things going on out there from trade policies to manufacturing data right at the other thing. So we're just continue to while keeping our eyes really closely on it and stay really and very in touch with our customer several well and make adjustments that as best we can to both preserve the profitability level to come.
Funny, but the same time.
Planned investments to off for 2020, when it comes to customer and candidate acquisition and retention.
Understood Nice job, then obviously yet.
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And your next question comes the line of John Healy with North North Coast Research. Please go ahead.
Hi, Thank you.
I wanted to ask you guys, hey, like diving, a little bit more about do you buy relationship.
I apologize, but did you guys called that out joint venture or is that a partnership forget is that a business relationship just agreement, which I understand that's about share of higher working with them and then additionally, if the payroll any opportunity that you're working with them on if that's exclusive but it had.
And you know feeling to add or outlook range of you know how fast that can rollout as well.
Thanks, Sean as Patrick in terms of our relationship with Huber thinking that it was a business relationship where.
There is a is the client of ours in.
In terms of the impact to true Blue, we expect the near term impact.
To be relatively small as you might imagine.
The degree of impact on Trueblue, it's directly related to the pace of scaling.
And the degree of success of Newbridge ultimately has.
In the marketplace, we started in Chicago.
We'll be expanding to other cities soon.
[noise] our vision for the partnership is really straightforward, we believe the light industrial staffing market along with some adjoining staffing verticals are ripe for digital transformation as you know.
We've been investing heavily in our capabilities and are seeing first hand in the early stages of that transformation. So we're pretty confident in the digital capabilities that we've rolled out in our business.
Good job stacking it is a best in class solution and ultimately, we think will drive above market growth.
One important point to note about this relationship with Uber is that when you studied other industries.
That is that have been disrupted oftentimes the pie has gotten bigger getting good example, as you bring the cabbage patch business end user behavior changed and created a bigger pie and we think that there's elements of that phenomena here.
As well and so whats in it for Trueblue with the partnership.
First if either words proves to be successful.
This will be lucrative.
For Trueblue and we'll profit from from the Partnership's success.
Theres the obvious revenue and EBITDA lift it would come from from the services that were providing.
Secondly by partnering with a nimble and innovative company like you do we think theres. Some practical learnings that will accrue to both companies we've already seen some of that happened already.
And then thirdly, a you know we view Neighborworks has an anchor client and should we decide we want to launch.
Employer of record services to other companies with similar needs, we have that additional optionality in terms of a referenceable anchor client.
To to jumpstart that effort.
Related to your question on is this an exclusive relationship we're one of two with a much larger partner among the two.
And so it's not completely exclusive but its limited two to two firms that are that are providing support with us being larger of the too.
Great and along those same line, but I don't Wanna get too much into the while the science fiction, but you thought about I'm kind of rubber and lift from that kind of they.
The ride hailing or the digital category and itself is there.
Regarding talk about Proprietarily working to become the employer of record for those potential drivers that are on those platforms and knowing from state.
Legislative battles that that might be starting up I was just curious as in body of that kind of if you guys have studied that part of the market and if that is something that potentially could be on the horizon for the company.
Well I'd say this I wouldn't rule it out we've certainly taken a look at it.
We want to be prepared should that eventuality cone, but I don't think we're ready to.
To make any pronouncements on that yet certainly there could be a pretty significant business opportunity there down the road.
Understood understood and then on the final question for me he does not gonna calendar for for the fourth quarter is there anything worth noting in terms of the days or the way the holidays fall and you know just how you think about whether in the pluses and minuses.
Hi, good things add up for the fourth quarter. Thanks.
Well the one thing that on a mentioned is that a there'll be a slight benefit this time around with a slight less benefit because Christmas falls on on Monday versus a Sunday last year.
So there could be a slight negative impact or excuse me I got my Dietz wrong.
It falls on a on a Wednesday versus a Tuesday.
It is a little bit more during the middle of the week versus the earlier par weeks, there could be a slight amount of that.
Headwind from that but.
Nothing.
Significant we're calling out John .
Thank you guys.
Your next question comes the line as a Henry Chen with BMO. Please go ahead.
Hey, guys. Good afternoon, I wanted to ask about the planned cost cuts and investments just wondering if you could talk a little bit more about sort of where are you finding efficiencies and then.
Turning to.
Okay.
Thanks, Henry other cost cuts that we made were in the people ready organization and specifically I'll start by saying, where we did not cut we did not make any cuts in our our branch organization. In fact, we're adding some resources in that area. So folks that are that are working with workers and working with clients on a day to day.
Basis, there were no cuts in those areas.
We made a number of cuts more at the senior levels in terms of the leadership team and wanting to layers down from that organization. So we are flattening the organization.
Bringing leadership team closer to.
Closer to the field organization, we also.
Received some.
Some concessions from some of the vendors this support us as well so it wasn't all.
In the area of head count reduction it was a pretty broad based.
I'm going to look where we could we could make some cuts that wouldn't necessarily impact our clients or our workers. So those were the areas of focus Henry in terms of terms that areas that we cut in terms of investments one of the one of the challenges that weve.
Had over the last couple of years has been around our client count.
Got a pretty good job from a pricing perspective of.
Keeping up with wage increases and pricing that and we've done a pretty good job of of retaining our clients, but one of the things. We haven't done is good job in is going out in acquiring new clients and then hanging on to them in the early days those that have been with us for a long time, we've done a good job with but the early days is where we've had some challenges and so.
What we've done as we've made a multimillion dollar investment.
And the team that's focused on Onboarding, our clients and making sure that they get off to a really good start and then once they're on boarded.
We've also made some pretty significant investments in the area of expanding wallet share within those clients and making sure that they get signed up on jobs stacking are using it in a heavy way and so we rolled that team out in the third quarter and early days.
Been really successful in fact, we're probably going to be expanding the size of that team based on the early results that we've had and so we've carved out about $3 million of the of the cost savings that we had and we're looking to reinvest in our sales and marketing capabilities aimed both it and new clients as well as within our existing installed.
Yes, and so those are the areas of focus.
Got it okay, great. That's helpful and just on a on people management I'm just looking at the business I mean, it it appears to be facing some some pretty significant headwinds both both on pricing and volume just just kind of curious.
Mike what where are you seeing the new business and you know what why is it I guess.
Sort of worth.
Continuing to sort of expand that business unit.
Well were actually pretty bullish on on people management right now.
We've had a number of wins.
In that business in fact, our Windsor up more than 20% on a year over year basis and.
It's a these are multiyear contracts with very large companies and so.
We're feeling pretty bullish on that business. After you rightly pointed out a couple of years of.
Really pretty unimpressive revenue growth and margin profile. So we feel like the pricing we put in place a solid on these new deals and a and these are large companies that are signing of the multiyear engagements and so he knows we look into 2020 and beyond.
We see that business returning to growth.
HM.
Got it Okay makes sense. Thank you.
And our final question comes from the line of Mark Marcon with Bard. Please go ahead.
[laughter].
Hey, Patrick harder.
Just wondering with regards to the.
The workers comp.
Underlying reason why though workers' comp went up.
Hi, Mark as Derek here.
The our run rate this year has been.
Quite consistent Norfolk workers compensation as a percentage of revenue during the third quarter was the same as was in the second quarter is just that in the the third quarter of last year, we had the benefit from reductions to prior period reserves was larger than normal and took that down to get solved the problem, our lowest point that weve.
I believe we've ever had unless we've done an EBITDA exclusion certainly the lowest point during the 2018 fiscal year.
Got it.
Okay, Great and then with regards to people ready just in terms of the trends that you're seeing in the business could you describe.
Outside of the construction areas, what you're seeing is there any light up Hamburger tunnel and also could you talk a little bit about what you're seeing in terms of what minimum wage increases.
Having gone through how's that impacting demand.
And and just how hard is that some of the position.
Sure. So if we're talking about.
About people ready from a trend perspective certainly.
Manufacturing has been very heavy.
[noise] a headwind so put into perspective in Q1 of 2019, we were down about 2% manufacturing during the third quarter, we were down about 15%.
You know early my earlier comments, there is a <unk> a little bit of additional pressure coming from construction in the early parts of the fourth quarter, but overall construction for the most part held up pretty well in the first first two quarters.
We're also seeing a pressure in the in the transportation industry.
That that that business is down.
Low double digits called minus 12 minus 13%.
And then.
How are you got some other businesses if you take out.
Some of the retail.
Noise that we've had.
In the business, particularly this last project that we just did in Q3 retail in the people ready business has actually been holding up quite well I mean, we were up mid single digits as forms growth. There. So there's some resiliency for us in that business.
When it comes the minimum wage increases you know the last set of minimum increase wage increases. This year was in California. Those have been the toughest because those have been sizable increases that had been happening year. After year. So those are those are tough costs for business take on year. After year, we typically see a little bit of.
Pressure on that in the early parts when it first comes through and then that moderates three to four months afterwards, and we recover on the volume I would say that that's a way this has been running its course.
As far as minimum wages for increases for next year, we're still in the process assessing that.
But I wouldn't be surprised if it was relatively close to the minimum wage increases that we had this year, which was roughly $10 million with minimum wage increase that we push through.
Filling open requisitions with with people it's.
There's still quite tough we're in an environment here where.
Oh, you know businesses are really looking at their workforces and where they know oftentimes go first is the contingent space. That's only 2% of total unemployment and that's why you're seeing a course more of that headwind in the staffing businesses than you are the overall employment numbers. So you take that with still.
Okay.
A wall on economic workforce, that's pretty much fully put to work. Its it is challenging environment to fill those positions given what's going on.
I mean, when you think about.
Kind of the overall macro environment.
It has been soft.
Mmm softening throughout the year, obviously as you start looking towards next year.
What are the factors that you would say would make you feel more optimistic or less optimistic about the.
The trajectory and potentially hitting an inflection because it sounds like you're doing well one job stock.
It sounds like you've got some contracts lined up on the people ready side.
So how are you thinking about God and also just deploying the capital on the buyback.
Well, we're focused on as we know how can we best operate under these conditions and were in place where we've got an opportunity is to increase the percentage of candidates that make it through our hiring process. So a big focus of ours in 2020, while we have John back in place and it's the matching engine for that.
Brings people, who are not candidates, but actual employees and matches them with jobs, So thats really about utilizing the workforce.
We are we're investing a lot of timing and resources in changing the experience that are candidates have and how they come through the system to become an employee and become Onboarded and.
And we think we've got some some opportunities to make that much more seamless and then.
A sizeable.
Improvement in the conversion ratio of those candidates so.
In 2020 will also be expanding our jobs to happen job stack application for that to also be the process in which employees or come to work for us, which we think was it will cut down the time.
Significantly that it takes and make it much more seamless for the candidate and improve our conversion ratios of applicants.
I wanted to understand that Dirk.
Pardon.
How are you experiment Dirk.
Well, you said, you're going to expand job Scott next year and.
Yeah, and so instead of going through our our legacy applicant tracking system now candidates will be applying really through the job stack application. So it will become a more.
Kennedy facing application and they will move through the process with some of the things that we've learned about a digital business model that makes that a much more.
Easy and seamless experience and then they'll also.
Once they come to work for us of course get dispatched outlay. So that's that's those are plans that we have for for 2020.
Great.
When it comes to capital allocation you now the.
Where we don't think it's the right time to be seriously looking at acquisitions, given the uncertainty that exists out there.
On the horizon, where to clear and theres be less uncertainty when we move change our minds on that a bit.
On the you know the other side of the coin hopefully it doesn't go this way, but if we were to get into more of a traditional recession and.
Feel like we are more in the bottom and there were some some deals that came along with some very opportunistic.
Prices, we would consider that if we could see that some uncertainty would be clearing in the near future, but outside of that we're going to our number one place of putting our time and resources in this digital business model thing really true to that we're going to continue investing in that whether times are good or whether times are bad.
And then with excess capital that we have.
We plan to put that into share repurchase.
We launched we think doing some consistently makes sense, but also.
Repurchasing Opportunistically makes sense, so with less acquisitions.
You know as part of the strategy is theres more capital to put back to.
Stock repurchase and we authorized or announced today the board authorized an additional 100 million. So I think that speak somewhat to organise intentions.
It does I was thinking more about the timing of that being deployed particularly in light of strong balance sheet.
Well, you're right the balance sheets in really good shape and so now we could.
We probably wouldn't want to get over a turn of debt to EBITDA.
In this type of environment, but.
You know given the right circumstances, you could see us flex up on that some to to be opportunistic.
Great and then with regards to people ready.
About the.
Pacing.
When you would expect the inflection to occur given the contract signings and garden.
One other question would be like.
How should we think about the margin profile that occurred this past quarter.
On a sequential basis.
Relative to the sequential increase in revenue was there any more repricing or is there anything else to talk about there.
Yes, Mark as Patrick I'm in terms of the contract signings I was referring to people management in those earlier were was.
People management.
Okay great.
Well.
No, we're not necessarily giving guidance by quarter for for 2020, right now, but when you look at the the size and magnitude of a of the signings I think theres a pretty good chance that did in Q1, we will see a significant step up from where what we've guided two in Q4, so I.
I think it will be fairly early in the year that we'll see a pretty significant step up from a from where we've been again, assuming kind of current business conditions.
I'd been asked I think on an earlier call about when we thought the inflection point would happen I'd said the couple of quarters ago, I thought Q4, and we did see you know some improvement in Q or we've guided to improvement in Q4 versus Q3, but the deal is taking a little longer to to ramp up and implement than we'd originally thought so I think we'll really see that influx.
And in Q1 versus versus what we originally thought in Q4 this year.
Great and just because it relates to the people management margin. This past quarter was part of that due to the efforts to to sign some of these larger deals or any sort of setup fees or anything along those lines or what led to the.
The sequential decline in EBITDA margin management.
Yeah. It was mostly it was mostly timing involved with less than a handful of customer accounts, some which were positive some which were negative.
No.
But it's really just a one quarter impact so I think what you'll see well we don't we given guidance for the fourth quarter already you'll see when the results come out assuming where were within our guidance overall them with people management, you'll see a more normal year over year margin profile for four people management.
Consider the the third quarter, just so few client timing issues, but nothing that's sustainable as far as we can see.
Just on the guidance.
Two things one would be the.
The project work, which is continuing into Q4 would you expect that to continue into next year as well.
Yeah, Mark this is Patrick with that particular client we're in conversations now as we speak about.
Doing additional project work next year as well that this is a client it's been with us for for multiple years now and so.
The nature of the projects is lumpy.
But it's a very strong relationship it's one of our top 10 clients.
Turn to size right now so I would expect it will continue to see some lumpiness in terms of new projects in a in 2020.
Okay. So.
People shouldn't necessarily assuming that that five to 6 million that you're expecting to experience in Q4 should go away in Q1.
No I wouldn't I would not just draw that conclusion that this is a very large client that has a lot of projects.
Great and then the second question would be with regard to guidance you are excluding.
The cost for the restructuring correct.
Yeah, that's right Mark Weve the actions that we've taken.
Provide $2 million of savings in the fourth quarter, but.
But it also we've got $2 million cells of cost.
Bob Reserve related to some of the workforce reductions that take that part away. So that 2 million dollar charge that I just mentioned that will be excluded from adjusted EBITDA and adjusted net income.
Okay, and then how should we think about the tax rate for next year just broadly speaking.
Assuming that walks he goes through.
Yeah, this 14% that we've been.
Talking about this year should be a about the right amount the right rate.
Our next year I mean, we're still putting together our estimates for that but we've stayed within a 14% expected rate throughout this year ends at the stuck with that for the fourth quarter I don't see any reason to change that at this point in time.
But will you know, sometimes there's some new tax things that come up and we do we'll wrap that into that but.
It looks pretty good for now.
Great. Thank you.
Okay.
Thank you and I will now turn the call to Patrick morale for closing remarks.
Thank you and I appreciate everyone listening to our.
Third quarter earnings call, we'll look forward to talking to you again in 2020 I have every week every one.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.