Q2 2018 Earnings Call
One two the true Blue second quarter 2018 earnings call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you, they're gafford executive Vice President and Chief Financial Officer, You May begin your conference.
Good afternoon, everyone and welcome to today's call.
I'm here with our Chief Executive Officer, Steve Cooper, and our President and Chief operating Officer, Patrick Burrell.
Before we begin I want to remind everyone that today's 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.
We use non-GAAP measures when presenting our financial results.
Included as adjustments to net income in our Q2 results are integration and acquisition costs.
Amortization of intangible assets.
Cloud based software implementation costs.
And adjustment of the effective income tax rate to the ongoing expected rate of 16%.
Adjustments to EBITDA include work opportunity tax credit processing fees.
And cloud based software implementation costs.
Additionally, in our outlook for Q3, we have included an adjustment to net income and EBITDA for the acceleration of equity grants associated with the CEO transition announced today.
Please refer to the non-GAAP reconciliations in today's earnings release.
And on our website at <unk> Dot com under the Investor Relations section.
Any comparisons made today are based on a comparison to 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.
Okay, I will now turn the call over to Steve.
Thank you Derrick and good afternoon, everyone and thank you for joining us.
Our total revenue increased 2% on an organic basis excluding.
Excluding our divested <unk> business and the recent acquisition of TMP.
We are pleased with this quarter's results, which included revenue growth of people writing.
Operating margin expansion and strong growth in net income per share.
We experienced widespread revenue improvements and are people ready business driven by our consistent focus on business development activity.
For Q2 people already revenue increased 2% versus the 5% decline in Q1.
Our people Scout segment produced 19% organic revenue growth in Q2.
Which was the fourth quarter in a row with double digit growth.
Efforts to reduce cost of services across all segments continue to produce value.
Our gross margin expanded 150 basis points, our 10th consecutive quarter of gross margin expansion.
Which contributed to our adjusted net income being stronger than expected.
Net income per share increased 42%.
This improved profitability was the result of a lower effective tax rate.
Share repurchases and stronger business results in particular.
The strong revenue results of people ready continued.
Continued growth in our high margin people scale business and the fact that our focus on reducing our cost of services is paying off all drove profitability growth.
The progress we've made as a welcome confirmation that we're focused on the right strategic priorities.
On the technology front, we are leading the way in digitally transforming how we connect people and work.
Job stack is our digital platform and our people ready business.
That matches, our workforce with available jobs.
And allows our customers to initiate orders.
Jobs that can make this match within minutes and provide customers with the confidence their needs will be met as they have the ability to track their orders from dispatch to arrival and quickly approve the workers' hours at the end of their shift.
The recent launch of our proprietary talent acquisition technology of Phoenix, and our people Scout business continues to receive high levels of praise from our customers and a great deal of interest from prospective customers.
The Phoenix provides job seekers are user friendly experience and quick into the pace of filling customers' requisitions.
Our global <unk> strategy remains a key priority.
Over the past few years, we've been executing on our initiative to expand our global presence of our people scout business in the <unk> space.
During Q2, we announced the acquisition of TMP.
A leading provider of <unk> services <unk>.
Resourcing and recruitment marketing services in the United Kingdom.
While relatively small in size the strategic importance of this acquisition is worth noting.
Not only does it expand our highest margin business.
It also opens the door for us in the U K and the European region.
Improving our ability to compete for a multi continent RPM engagements.
Another topic, we frequently addressed is our commitment of returning capital to our investors through share repurchases to enhance shareholder returns.
During Q2, we repurchased $19 million of stock.
And we will remain active in this regard.
We have a significant portion of our $100 million authorization received in late 2017 remaining to buy back shares.
Today, we also announced that I've decided to retire at the end of December after nearly 20 years as an executive at true Blue and.
In over 12 years as CEO .
The Board has asked me to serve as chairman of the board and I am excited to remain involved with true Blue and this board leadership role.
I'm very excited to announce that Patrick burrow has been named our new CEO effective September one.
At which time I will begin serving as executive chairman of the board.
Upon my retirement at the end of 2018.
I will remain in my board leadership role as chairman of the board.
Patrick has spent over 22 years in the staffing and recruitment process outsourcing and consulting industries.
Since joining <unk> in 2014 and taken on the role of President and Chief operating officer in 2015.
He has worked closely with me before executive team and the board of directors as he has led all operations across the company, including sales human resources and our digital transformation.
He is a well respected and proven leader within our organization with our customers and with our industry.
His industry experience track record of success and intimate knowledge of our business make him an exceptional choice as our next CEO .
Joe San Montero has served as our board chairman for 10 years.
And as a director for 18 years.
He has been involved the true blue for over 21 years.
And while on executive he served in multiple roles, including CFO President and CEO .
During Joe's years of service revenue was growing over 10 fold.
Joe will continue to serve as a director on the board.
We all thank Joe for his significant contributions to our organization. We are grateful for his impact that will last well into the future.
Okay.
We're also taking this opportunity to add one more highly accomplished individual to the board.
Effective immediately Christy SAB accrual will join <unk> board of directors.
Christy is a proven leader in the human resources and technology industries.
She served as Chief Executive Officer of Aon Hewitt.
The global human resource solutions business of Aon.
Until her retirement earlier this year.
He was responsible for setting the firm's business and solution strategies and overseeing its global operations as well as sponsor and your relationships with its largest clients include.
Including a substantial portion of the fortune 100.
We welcome Kristi to our board and we look forward to her contributions.
With Patrick's significant experience and professional drivers our new CEO .
Along with a very strong board and management team already in place.
We believe we have the right leadership to guide <unk> through its next phase of growth.
In conclusion I want to thank all the board members and all of the leaders along with all of the employees that I have worked with over the many years of service a true blue.
They have all had a significant positive influence on me and it's been an extreme pleasure working so closely with them throughout so many phases of growth and change of true blue.
Our mission of connecting people and work is noble and.
And the shared values, we all live in carrying out this mission are impressive.
The future is bright for true Blue, we have exciting strategies that will continue our growth and meet the needs of the marketplace and the changing world of work.
I look forward to continuing my service and my new role and I'm excited to see the strong leadership and experience of Patrick and the full leadership team expand upon what we've built together.
With that I'll turn the call over to Patrick.
Thanks, Steve I'd also like to thank members of the board for their leadership and support indeed, the future is bright at <unk>.
We have a great team and strategy in place and I'm excited about the opportunity to lead through blue into its next phase.
I'm going to walk us through the results of our segments.
And I'll follow that with a strategy discussion before turning it over to Derek.
More financial results.
People ready is our largest segment representing 60% of trailing 12 months total company revenue and 54% of combined segment profit.
People read these local relationships.
National footprint of physical branch locations and.
And growing use of technology are helping clients find contingent industrial labor quickly and efficiently.
People ready, 2% topline growth was driven by strong business development execution.
Changes we made in Q4 of last year are delivering the benefits we intended.
We flattened the organization to provide more accountability.
And focus on delivering service excellence to our clients.
We also made significant investments by adding more revenue generating resources to the people ready field organization.
As a result, we are adding new clients at a faster pace and gain wallet share with our existing clients.
All of which contributed to improving trends at people ready.
Turning to people management, which represents 31% of revenue.
17% of combined segment profit.
This segment provides on site workforce solutions in the North American industrial staffing market.
Revenue declined 2%, excluding the impact of plaintext, which we sold during the first quarter.
Our same store sales were somewhat lower than expected due to lower production volume with consumer products customers.
While we continue to win new business sales cycles have elongated a bit and the conversion rate wasn't strong enough to provide a full offset to same store headwinds.
However, the front end of the pipeline is strong.
Leveraging our onsite delivery offering we are well positioned for long term growth and people management.
Earlier. This month, we received notice that Amazon will be taking their Canadian business in house.
<unk>. This September this is consistent with the strategy they began to employ in the second half of 2016 to take more control of their own service network.
Over the past year, we've continued to service Amazon's Canadian operations, and while we successfully delivered on their contingent staffing needs by exceeding all key performance indicators. They have now decided to in source their Canadian operations to make mirror the shifts they made in their U S operations back in 2016.
While this is not necessarily welcome news Amazon is already a much smaller portion of our business than it was in 2016 and.
And the diversity of our overall client base remains a source of strength.
With no single client representing more than 3% of total company revenue on a trailing 12 month basis.
Turning to our final segment.
People Scout is the global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings.
People Scott represents only 8% of revenue, but 29% of combined segment profit given its attractive margin.
The business grew 19% organically.
Which was its fourth consecutive quarter of double digit topline growth.
And segment profit expanded to 12%.
Continued growth and margin expansion is driven by both existing clients and new clients as we leverage our proprietary technology global.
Global delivery capabilities and market leading position.
Now I'd like to shift gears and talk a little bit about the overall direction of the company and the industry.
The world of work is rapidly evolving.
Many of the verticals, where true-blue operators are experiencing skill shortages.
And these shortages will likely increase in coming years.
Our clients are trying to make just in time workforce adjustments, even as the labor market tightens.
And our workers are also seeking increased flexibility, while using technology to find the work they want when they want it.
All of these changes create an opportunity for true blue to leverage our digital strategy.
Along with our existing network with clients and workers to transform the way people find work.
And businesses find people.
We see our digital strategy is helping us solidify our position as a leader fulfilling contingent and permanent positions.
And therefore, creating value for our workers.
Our clients and our shareholders.
With that in mind I'd like to give you an update on both jobs that Anna Phoenix.
Job stack as people ready next generation mobile app that algorithmically matches workers with jobs.
We successfully completed the rollout of the worker App in 2017, and we now have associated your option rates of nearly 75%, which already exceeds our 70% target in 2018.
In addition, the percentage of jobs being filled via jobs that gap continues to show progress.
Cross our entire network, we're seeing digital fill rates of approximately 30%, which is nearing our 35% year end goal.
Client adoption has our next major strategic goal.
We are seeing synergies now that both the worker and the client sides of the digital exchange our operational.
By the end of June we had 7000 unique clients on jobs that putting us on track to meet our year end goal of $10.
<unk> is already creating value for us.
And I'll share with you some of the statistics to make that point.
Our overall associate retention rates have been increasing largely due to associates on jobs that are being significantly stickier and.
And more active and taking shifts and associates not on jobs Act.
Also over 80% of clients on jobs Tech report that people ready is filling a higher percentage of their orders in.
And prior to their use of jobs deck.
In addition, we continue to find that branches that have most aggressively adopted job stack.
Those with greater than 50% of their orders filled via the tool.
And two percentage points higher year over year revenue growth versus all other branches.
In summary, <unk> is helping us boost both worker and client loyalty and we're also starting to see revenue lift. These are all exciting developments and we hope to share more in the future.
People Scotts, New Phoenix platform, our proprietary talent acquisition technology last late last year is resonating well with existing and prospective customers.
And we are increasingly optimistic about the growth potential created by the strategic approach.
In fact since the Phoenix launch people Scott has secured 18 new logo wins.
And 28 client contract extensions.
The Phoenix is a next generation talent acquisition technology that streamlines, the recruiting process and creates a consumer like experience for the Kennedy.
Making it a world class candidate attraction and technology.
Another key piece of our strategy for people Scott fell into place with the acquisition of TMP.
As Steve mentioned this acquisition opens the door for us in the U K and European region, increasing.
Our ability to compete on multi continent RP O deals.
The UK is the second largest <unk> market in the world.
And it's also one of the most common markets included in multi continent RP O deals.
The TMP acquisition brings us a physical presence and referenced whipple clients, which we believe will enhance our ability to compete on multi continent engagements.
Furthermore, <unk> has a strong employer Randy practice.
And this adds to a new in demand solution to our existing <unk> services.
Since employer branding is now part of more than 50% of all RPM engagements.
In summary, <unk> is performing very well.
And we're excited to leverage both the Phoenix and our expanded global presence to win multi continent deals.
And drive growth going forward.
With that I'll hand, the call over to Derek for more in depth review of our financial results.
Thank you Patrick IMAX.
I am excited about the leadership transitions announced today.
Happy that Steve has agreed to serve in a leadership capacity on our board of directors.
His knowledge of the human capital industry.
Shareholder focused mindset.
And strategy development skills will serve shareholders well into the future.
I'm also pleased to see Patrick become our next CEO .
I had the opportunity to work closely with Patrick over the last four years.
As an effective and well respected leader at our company and has a strong command of the business as we run the company as preparation for this that has been thoughtful and thorough to ensure a seamless transition while maintaining momentum on strategic priorities.
Turning to the quarterly revenue results.
Total revenue was $614 million was higher than our 585% to $600 million expectation due to stronger performance by people ready.
The acquisition of TMP added about $3 million of revenue, but did not have a meaningful impact on total company profit.
Net income per share was <unk> 44, and.
And adjusted net income per share was <unk> 57.
<unk> <unk> above the midpoint of our 47 to 53 expectation.
The adjusted EPS performance was primarily driven by stronger performance of the people ready business.
Adjusted net income per share increased by 36% or 15.
Out of this increase roughly eight was from a lower effective income tax rate <unk> from a lower share count and.
<unk> <unk> from operational performance.
Gross margin of 27% was up 150 basis points.
Representing our 10th consecutive quarter of year over year gross margin expansion.
90 basis points of the improvement is from our staffing businesses.
Primarily driven by lower workers' compensation expense as a result of a variety of safety and claims management practices.
The remaining 60 basis points of improvement is from a recruiting process efficiencies.
The addition of new higher margin business within people scale.
SG&A expense was up $9 million with.
With $2 million of the increase from integration acquisition and cloud based software implementation costs $1 million of operating costs from the acquired TMP business.
And the remainder from higher operating costs associated with organic growth initiatives.
Total adjusted EBITDA was up 9% to $33 million.
And the margin was up by 40 basis points.
Our effective income tax rate came in at 13%.
Less than our 16% expected rate as a result of stronger performance on work opportunity tax credits.
Turning to our segments people ready revenue grew by 2% and.
An improvement from the decline of 5% in Q1.
The improving revenue trends were broad based across most geographies and industries.
Segment profit was up 21% as a result of revenue growth and higher gross margin.
People manage that unit revenue declined by 7% overall.
Or a decline of 2% excluding the plaintext business that was divested in Q1 of this year.
This was slightly below our expectation due to lower production volumes at certain clients segment profit was down 15%, excluding playing tax and the overall margin was down 60 basis points. In Q2 2017. This segment experienced a client service level benefit that did not reoccur in Q2.
2018.
Excluding this item and the plaintext divestiture segment profit declined by 9% and the related margin was down 20 basis points.
People scale revenue was up 25% or 19% on an organic basis from a combination of new logo wins and scope expansions.
Segment profit was up 12%.
Our segment profit margin was down 230 basis points this quarter.
Due to $1 million of administrative costs that are not expected to reoccur.
Excluding this expense segment profit was up 19% on an organic basis.
And related margin was up 10 basis points.
We acquired TMP, which.
Which is now part of our people Scout segment effective June 12 2018.
The purchase price was $23 million.
Representing a valuation multiple of seven five times next 12 months segment profit.
We expect CMP to produce annual revenue and segment profit of $50 million and $3 million, respectively, with an impact to our Q3 outlook of approximately $15 million.
And $1 million respectively.
Our outlook does not assume any synergies.
I wanted to take a moment to discuss TMP segment profit margin since.
Since many of you may have noticed at the annual implied 6% segment profit margin on Tmp's business.
Is lower than the margin in the legacy people Scott business.
The lower segment profit margin is primarily the result of low margin pass through revenue related to media purchases on behalf of clients.
And higher service delivery costs due to the small size of the business in relative comparison to the legacy <unk> business.
Excluding the media pass through business.
The underlying segment profit margin is approximately 14%.
We believe there are a variety of integration opportunities to lower service delivery costs.
Which we will speak about more after we complete our integration work over the next 12 months.
We also expect a smooth integration as we apply the Rps integration process that was created after the Aon Hewitt <unk> business was acquired in 2016.
The balance sheet remains strong year to date cash flow from operations totaled $49 million and capital expenditures were $6 million netting.
Turning to free cash flow of $43 million.
We ended the quarter with total debt of $117 million and a debt to capital ratio of 17%.
On a trailing 12 month basis, our total debt to adjusted EBITDA multiple stands at 0.9.
We made good progress returning capital to shareholders.
Year to date, we repurchased $19 million of common stock all of which was repurchased in Q2.
Representing nearly 50% of year to date free cash flow, which is defined as operating cash flow less capital expenditures.
This leaves $74 million available under our existing authorization.
Yes.
In July we establish a new credit facility, which replaces our previous credit facility that was set to expire in June 2019.
Our new revolving credit facility provides a line of credit up to $300 million similar to our prior facility with an accordion feature up to $450 million.
For additional details please see the 8-K filed on July 16.
We also filed an S. Three renewing our shelf registration, which was set to expire on August 13th of this year.
While we have no plans to use this registration.
It allows us to quickly act excess capital should the need arise.
Before turning to the company outlook I want to specifically address the impact of Amazon.
For the last 12 months revenue and segment profit from Amazon totaled $53 million and $6 million respectively.
The loss of Amazon business effective September one 2018 will create a revenue headwind of approximately $8 million in Q3 2018.
Or a growth headwind of 4% for people management and 1% for the total company.
The fourth quarter is our highest volume period with Amazon and.
The revenue headwind will be $24 million.
For a growth headwind of 11% for people management.
And 4% for the total company.
Additional quarterly details on Amazon are available in today's earnings presentation.
Turning to our total company outlook for the third quarter of 2018, we expect revenue growth of zero percent to 2%.
Excluding acquired TMP revenue, the divested <unk> business and the Amazon business.
Underlying organic growth rate is expected to be 1% to 3%.
As a reminder, the company's revenue growth in Q3 2017 benefited by about one percentage point from hurricane related business.
Yes.
We expect net income per share in the third quarter of 2018 of 54 to 60.
Our 75% to 81 on an adjusted basis.
Which assumes a share count of $40 1 million.
And an effective income tax rate of 16%.
We are focused on three simple principles to increase shareholder value.
Our primary focus is centered on increasing organic revenue to drive higher adjusted EBITA margins.
With people already returning to growth the future looks bright due to the strong operating leverage of this business.
People already makes up 54% of total segment profit and.
And has the potential to deliver a 15% plus incremental operating margin on mid single digit organic revenue growth.
Our second area of focus is effectively managing our cost of services and operating expenses.
And further improve our ability to enhance adjusted EBITDA margins.
Attention to this area has produced 10 consecutive quarters of gross margin expansion and kept operating expenses in chess.
Third as effective management of capital.
Total debt to trailing adjusted EBITDA is less than one turn despite the recent purchase of TMP and stock repurchases.
We expect to continue returning excess capital back to shareholders through share repurchase.
These items combined with a significantly lower effective income tax rate bode well for future earnings per share growth.
Okay. We can now open the call for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Your first question comes from Jeff Silber with BMO. Your line is open.
Hey, good afternoon, it's Henry Chien, calling for Jeff.
Okay.
Just wanted to follow up on the Amazon impact.
I think you said it was 24 million in revenues I believe for sure.
June quarter, and then $8 million.
<unk> cash.
What benefit you.
So just I guess first question.
Beyond that quarter with.
What's the size of the Canada business that we should assume should be going away.
Hi, Henry Good afternoon, it's derrek here.
So the $8 million of headwind that we were referring to is the headwind that's going to come in Q3, as a result of less Amazon headwind.
The question as far as where the Amazon relationship stands in its totality.
On a trailing 12 month basis.
We've done through $53 million of revenue with Amazon and $6 million of segment profit.
I'll refer you back to you.
You haven't got a chance to look at all of those but if you take a look at our earnings release deck in our outlook section.
We put some quarterly information trailing four quarters of both the revenue and the segment profit that will be helpful for you but.
And big picture of $50 million of revenue ish $6 million of segment profit.
About half of that segment profit, let's call it $3 million or so will be a headwind. This year and then the other $3 million will be a headwind.
The first mostly the first two quarters of next year.
Okay.
Got it okay, that's helpful and $6 million.
Yes.
That's for the year.
$6 million, a $6 million on a trailing four quarter basis got it okay and so forth.
Third quarter and sorry, if I missed this in.
The slide deck, the operating impact from Amazon from <unk>.
It's going to be about $88 million less in revenue than we would have if we kept the relationship and kept revenue flat on a year over year basis.
Got it and.
The operating.
Profit impact.
Straight up in recent quarters, and so that bodes well for future quarters.
We're also seeing a good bit of expansion.
Within our existing client base oftentimes when an arpeggio deal is sold.
It's for a partial amount of scope and when we prove ourselves then the client will continue to add more positions more geography's more process steps in so that combination of going out when in new engagements and expanding scope with our existing client base have been the two primary drivers of growth.
For for people Scout.
Got it okay, yeah, that's how fun and just in terms of the demand for our P O.
Is there.
This is the right way to think about is there a.
Kind of a.
I mean.
Meaningful shipped to using our P O vs using a permanent placement type of service.
<unk> firm or a placement firm.
[noise] well one of the things that we've seen over the last couple of years is.
Companies are looking for scalability.
Both from a seasonal perspective, as well as a cyclical perspective, and so a lot of clients are engaging us for scalability reasons.
A second reason that we're seeing clients engage us is RP engagements typically are a cost savings opportunity for clients, particularly if they're using third party agencies would carry a much higher.
Cost on a on a per hire basis and so.
Hands on the client starting position the degree of savings.
But.
We're seeing a lot of opportunities for saving clients significant amount of money. That's one of the key reasons why they are engaging us in addition to that scalability.
Point that I made earlier.
Okay.
Oh, great. Thanks for the color.
Your next question comes from John Healey with North Korea Research. Your line is open.
I think you wanted to ask just a little bit more about the the bounce back you know peopleready revenues. This corner I was wondering if you could give us a little bit more color on the performance by month for the segment and if you look at it kind of hours versus wages, maybe what the performance might be so that segment.
Yeah, we're really pleased with the performance. This this quarter with Peopleready, the 2% Grill thumb.
The the growth Peopleready exited the core quarter at 3%.
Exit right.
You know if he had any if you get into looking at the revenue trends with a very broad base quarter for us the prudent.
It wasn't a big project it wasn't a big client.
Every.
Every industry vertical that we serve either had growth or the sales trend proved.
On a year over year basis, if you're comparing Q1 Q2.
From a geographic perspective, very broad base as well.
I'll turn our top 10 states.
The revenue trend improved from Q1 Q2.
The only exception to that's California, California had a minimum wage increase that went into from to play at the beginning of the first quarter. So you we normally see a spike in revenue as we increase the bill rates and then that tapers down a little bit of people trips of hours and then it turns to recover in the third quarter.
I think that has less to do with with us on some of the adjustments we've made from a business development perspective than it does.
For any other reasons.
Your last question when it comes to.
The margin or excuse me to build rates.
Ours are slightly down for us I mean, our bill rates are running up.
About 5% ish.
So.
Deduct out the.
Do the math on the hours, you've got probably about an hour decline of around 3%.
That's probably the best where we've been from an hour's perspective, both of ours declines have been slightly larger than that and have you looked at prior periods.
So I think I've got all your questions. They are John if I missed something once you hit me back with another follow up question.
That's very helpful and just wanted to ask just kind of where we're at with the business right now as I look out the next few quarters. It seems like there's a number of moving parts like that.
Acquisition, the Amazon business out of Canada kind of going away.
Just as you look at the revenue profile of the company.
Take your guidance on a pro forma basis low single digit revenue growth.
Isn't that kind of environment, and where you're at with investments in your business today, what do you think that kind of corresponds to the level of SG&A that you would.
Feel like SG&A has been growing more to mid single digit type cliff, even though the revenues are kind of low single digit is is that the right kind of calibration for what those too.
That SG&A level should be given the revenue growth procedures and the business maybe in the next few quarters.
Sure well from a from a Brian perspective, we're feeling really good about the future here I'll.
I'll, just talk about where we feel from a growth perspective.
From a macro perspective, we liked the macro environment things look really healthy to us I mean this is this is environment, where we think we can be putting up mid to upper single digit organic growth percentages and really be pushing some operating leverage through the business.
From a.
From an SG&A perspective.
You know.
In some of our results we've got some had box in there you know some some unique items.
If you look at our guidance for the third quarter and exclude any unique items that we've got and therefore add backs the rate of SG&A growth is is pretty close to what will expect the revenue growth to be on an organic basis. So I think it's pretty much in line with where the revenue growth is headed in with the gross margin expansion that we've been having that should.
Still produce some nice.
Operating margin or EBITDA margin, depending on how you look at it expansion.
Okay, Great and then I guess, they actually I just wanted to ask that question. He said you guys like the macro right now and.
You feel like that there's potential to be growing much faster.
I guess I just want to ask you what do you think's holding you back from doing that right now because I because I look at that for people ready business and it's such a big percentage still of what you guys are doing in that revenue level has been kind of kind of steady for awhile now and it just.
I'm just trying to understand.
What needs to give to you know to get to that upper single digit growth rate that you think the company could deliver.
Well I think we're well on our way we.
Take a look at where we've been that business has been.
In a period of.
Low single digit declines for awhile.
The bounce back this quarter was really nice plus 2% versus being down minus 5% in Q1, I think we've got the right things lined up really with people ready to get it to where we want into that mid to upper single digit organic growth.
Last last year. There was some changes that were made to to flatten out the whore charge to clarify roles, particularly when it comes to sales and who's responsible for that those were good adjustments that we made last year.
Being into this year as far as what the business development expectations are for our branch managers and how much time, they should be in the field.
And.
Those types of expectations have been well set so I think we've we've got things on the right track and that that's really what's producing the the term now particularly with.
But peopleready with our local accounts that was an area, where we've been suffering a bit.
We think it was mostly related to business development activities at the branch level, maybe silver lining on salespeople, a little too much versus the branch manager being actively engaged to the extent that we would like it and I think the right adjustments have been made John I think I think we just need to follow the plan that has been laid out and execute in and.
Well I think we'll continue to see some more men momentum and this revenue trend.
Assuming a healthy economic environment, which looks really good right now.
Great well I look forward to it guys. Thank you.
Our next question comes from the line of Mark Mark on with our W. Bird Your line is open.
Good afternoon person I'd, just like to say, Steve I really enjoyed working with you over the years and congrats.
Congratulations on the next stage in your career and Patrick Congratulations to you.
Thanks, Mark sure appreciate that thank you Mark.
Alright.
Just with regards to I guess first from a from a leadership perspective should we anticipate any any sort of downturns in terms of areas of emphasis for mystery strategic or.
Executional perspective, or any any sort of changes from that perspective.
Yeah, Mark this is Patrick Steven I've really been working hand in glove for the last several years on developing our strategy in the.
The areas that were focused that we're focused on you're going to continue to see.
Focus on the Digitization of Peopleready business rolling out, our jobstack capabilities to clients and to workers.
You'll continue to see a focus on.
Building that are global capabilities in the space.
You continue to see a focus on operating more as one company with more cross selling we've had a lot of success with our cross selling efforts and so we're making more investments.
And cross selling across the organization and other technology investments in.
Capabilities, such as a Phoenix.
And in some back office capabilities that we're investing in so.
From my perspective, it's going to look a lot like it has the last couple of years in terms of areas of focus in one of the things. They are mentioned earlier is really ramping up our ability to execute.
I think about peopleready in queue too.
We're starting to see the fruits of some of the changes in investments that we made.
In queue 40, and we've added.
Additional resources in our branches.
We're putting more focus on accountability on those branches and they're responding extremely well we.
We flatten the organization a bit and so I would expect it to the strategies that we've laid out we're just going to continue to try to execute on those better.
Steve I don't know if you have anything you'd like to add to that or not.
Appreciate that Mark we we've been anticipating this for awhile and working towards it and so Patrick.
Patrick and I have been shoulder to shoulder along with Derrek in.
Many of these strategies Patrick has just mentioned here and we haven't held back on what leadership team will support battery. So we have been very busy the last 18 months in adding strength to that layer. So when this day came Patrick can be very focused under under the business rather than even the change out.
The team below him. So I think that the team that got the results. This quarter are in play.
And I think the turn as nice as Derrek as mentioned in the results in.
We do believe that we've.
We've turned the corner and there should be good things to come from.
The strategies and initiatives that we've put a pleasure.
Great.
From the outside it seem pretty transparent in terms of the leadership was evolving so uhm.
Again, congratulations on that.
With regards to could Peopleready. So you know as we think about the turn you did provide some color in the dark with regards to headwinds on the energy side.
I'm wondering how we should think about that particularly from a margin perspective and how.
How that will end up impacting this turn here.
Yeah.
Alright, thanks, Thanks for that question Mark.
Just to kind of recap what's on our deck. So everyone can can know what we're referring to here.
Our energy business on a quarterly basis, the run rate, we've been averaging about $10 million or so a quarter.
Which has been a slight headwind compared to last year May give you. An example, Q3 up last year was $15 million. So.
Not too much of a headwind.
Thing that we wanted to call up in our deck.
Which we talked about.
Last quarter was that the fourth quarter of this year, there is a bigger headwind and energy. It's really the biggest one on a quarterly basis. So Q4 of 2017. The revenue was $26 million. So if we continue at this $10 million run rate that'd be more like a $16 million headwind and then after that we really get.
Into.
More stabilized basis.
The margin on that business.
It's probably it's a little bit lower than the overall peopleready business.
The overall margin on that business is probably Oh a.
Good maybe seven or eight points less on average than.
Are blended margin peopleready.
I'm talking about on a gross margin basis. So you can kind of flow that through from Ah.
Operating margin perspective.
Okay great.
Then with regards to.
The turn that you're seeing in peopleready outside of that energy business and the bill rate increases would you anticipate that the bill rates are going to increase of it even.
<unk>, 5% going forward or do you think that okay.
Good sustainable level at least for the next.
Two three quarters.
I think it's about right Mark if we were to break out where bill and pay rates have been this year. The dynamic there has been pretty consistent with what has been the last.
The last couple of years.
So I think that's about right in this environment.
We've been through the vast majority of the minimum wage increases, which really put a bit more spike.
In our rates compared to the.
General industry.
So I think that's about right.
Okay, Great and then with regards to the percentage of branches that are using jobstack the way that you would.
That you think is optimal could you give us an update there and.
Pick up there.
Yeah, Mark this Patrick we've got about 20% to 25% of our branches where the.
The still percentage of jobs coming through Jobstack is north of 50% so.
Yes, if you're asking the question is we're starting to get to optimal.
We've got about a quarter of our branches that are there. So we get a lot of upside.
And a lot of running room still with those other branches and we've.
Yeah.
In terms of like puts and takes.
Yeah, well I think as we think about listen we just call. It the back half of this year. Some callout to just to keep in mind is in the in the third quarter.
This year, we're faced in about a point of headwind because we had some benefit from hurricanes in.
In Q3 of last year.
And then as we go into the fourth quarter are really the two main things, we've called out pretty well here.
Which is the <unk>.
Energy area and in Amazon and I know you know this market because youre looking at the deck, but I will just guide everybody else to the back of our earnings release deck.
It provides more color on that I mean, those are really the two callouts outside of that from.
From a year over year perspective revenue wise, the underlying growth trends I mean, we're expecting those to be to be healthy.
The gross margins.
You've had some good success in lowering the cost of sales, we got still got a lot of programs focused on that and we're still managing our.
Our SG&A tightly.
We haven't got back debate single digit growth, yes. So we don't know that we need to keep the SG&A at about the same rate or less.
Growth than where revenue is excluding add backs that we've talked about so that's how we're thinking about the back half of this year as we're thinking about about 2019 I can tell you that we're planning the business for healthy growth.
We're planning on a growth year from a planning perspective.
Given any guidance on this but that's how we're thinking about it it's a it's a healthy environment. We've got people ready term the right way.
This Amazon business people management, we're expecting to be back into growth on an organic basis, excluding <unk> in Q3, and and the People's Skype business is doing really well and we're really excited about opportunities to get some of these multi continent deals. So we're we're feeling pretty optimistic about 2019.
That's great to hear congrats.
Congrats again, Steven Patrick.
Thanks Mark.
There are no further questions at this time I will now turn the call back over to the presenters.
Well, we appreciate you joining us today.
We're excited about these opportunities we have ahead and we look forward to updating you next quarter.
Okay.
This concludes today's conference call you may now disconnect.