Q3 2017 Earnings Call
One to the true Blue Q3, 2017 earnings conference 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'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw.
Your question press the pound key.
Thank you Mr. Derrek Gafford, 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 Chief operating Officer, Patrick Morrell, who also leads our mobile strategy.
Steve will provide a summary of our results and business strategies.
Patrick will discuss the operational elements of our mobile strategy.
I'll finish off with further discussion on our results trends and outlook for the fourth quarter and then open the call for questions.
Before we begin I want to remind everyone that today's call and slide presentation contain several forward looking statements.
All of which are subject to risks and uncertainties.
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 several non-GAAP measures when presenting our financial results.
Please refer to the non-GAAP reconciliations in today's earnings release and on our website at <unk> Dot com under.
Under the Investor Relations section.
Also any comparisons made today are based on a comparison to the same period in the prior year.
Yes, otherwise stated.
Due to the reduction in the use of our services by Amazon.
Which was announced in 2016.
We will continue to provide certain year over year comparisons excluding this customer.
We believe these comparisons are helpful in understanding the underlying trends in our business.
I'll now turn the call over to Steve.
Thank you Derek and good afternoon, everyone.
Revenue and adjusted EPS for the third quarter were both at the high end of our expectation.
Total revenue for the quarter declined 5% or down 2% excluding Amazon.
We saw encouraging revenue improvement this quarter.
We exited the quarter with a year over year growth rate of negative 3% for September .
An improvement over the negative 9% exit rate for Q2 this year.
The improving monthly results were due to better underlying trends across all of our segments I want to take a moment to acknowledge the personal impact. The recent hurricanes have had on us here at <unk>.
Several hundred of our employees and thousands of our associates were impacted across Texas, Florida, and Puerto Rico.
All are safe and their ongoing safety will remain our number one priority.
I couldnt be prouder of the preparation the dedication.
Of our employees at head and exhibited throughout.
True Blue teams started prepared internally, even before the storms hit.
Bundling pallets of suppliers with satellite phones generators pay cards water and employee care packages.
In the wake of the storms we've.
We've been leveraging existing client relationships and using resources like our mobile technology and recruiting vans to ramp up recruiting efforts and deliver much needed workers.
This is the work we do every day.
But it is especially gratifying to be there when the communities we serve need us most.
Overall, the Hurricanes did have a modest positive impact on our topline results, providing a 1% lift to total revenue.
Turning to profitability.
Our third quarter gross margin of 26% was 40 basis points higher than Q3 last year.
This was the seventh consecutive quarter of year over year gross margin improvement.
It's important for us to balance the discipline of pricing in the current rising wage environment.
With our desire to stay competitive.
Our primary long term focus is still centered on EBITDA margin expansion through disciplined pricing.
Smart cost management.
And operating leverage associated with our higher organic revenue.
And our focus on driving our higher margin services.
Now I'm going to update you on our strategic initiatives and financial performance by segment.
People already is our largest segment representing approximately 60% of total company revenue over the last four quarters.
And 56% of adjusted segment EBITDA.
And we're especially pleased with its improving topline trends.
People are ready as local relationships and national footprint of branch locations.
Helps clients find contingent industrial labor quickly and efficiently.
Over the past year.
We completed the transition to a single specialized staffing brand, which makes people ready.
Offering simpler and more transparent for both the customer and the job seeker.
Revenue trends have been down this year as we've grappled with a low growth macro environment.
As well as temporary disruptions from operational changes related to the brand transition.
The good news is the business is adjusting to the transition and the monthly trends improved considerably.
Two a decline of 1% in September compared to a decline of 9% in June .
I'm very excited about the future for this segment.
Especially since people ready is just beginning to leverage our mobile strategy, which we will speak to here in a moment.
People management.
Representing approximately 33% of total company revenue over the last four quarters.
And 20% of adjusted segment EBITDA.
Offers onsite workforce management and productivity solutions, such as cost per unit pricing through.
Through our staff management and Cmos brands.
We serve Amazon out of this segment.
And while that client has scaled back the business held steady in the third quarter on an ex Amazon basis.
Our first area of strategic focus for people management is growing our workforce productivity solutions.
<unk> strong value proposition and a higher margin.
For example, Cmos, our highest EBITDA margin business within people management.
It helps customers become more efficient and reduce labor costs by using cost per unit pricing.
Rather than traditional hourly bill rate pricing.
Helping customers reduce their labor spend by 15% or more.
The second area of strategic focus for people management is the e-commerce vertical.
E Commerce continues to show strong growth, making the retail supply chain labor needs more volatile and increase.
And the demand for <unk> ability to deliver a flexible fully sourced and managed workforce.
People Scout represents approximately 7% of total company revenue over the last four quarters.
At 24% of adjusted segment EBITDA.
This segment, primarily provides recruitment process outsourcing services also known as <unk>.
As well as managed service provider services or MSP.
<unk> and MSP are 87% and 13% of people scout revenues respectively.
Both services make it easy for companies to hire efficiently improve.
To improve the quality of hire and retention.
Reduce costs stay competitive and improved visibility into their overall workforce spend.
People Scout is performing very well with 10% revenue growth in Q3.
People Scout, we leverage proprietary technology.
To provide a compelling value proposition for our clients and building their own teams.
And this segment continues to generate our highest EBITDA margins.
People Scott was recently recognized by the adverse group as the largest <unk> provider globally in terms of the number of annual people hired.
<unk> was also recognized as a major contender in the Asia Pacific region region, with our fast growing presence there.
<unk> was also recently recognized by <unk> Today magazine, and Theyre independent customer satisfaction survey as one of the top enterprise RPM leaders.
And even more exciting is number three among health care providers.
This is the first year that people scout has been ranked on the HRA today's top list for health care providers. We are thrilled to have our growth and world class service delivery for our health care clients recognized.
As we plan for 2018, we are focused on initiatives to enable people scout to continued increase our market share in this high growth Rps segment.
We are proud of the three service segments True-blue operates people ready people management and people scout.
And look forward to continued growth opportunities as businesses continue to turn to partners like <unk> to help manage their workforce needs.
Today, we announced a $100 million share buyback authorization.
With our growth strategies increasingly focused on organic growth.
We expect more cash available to return to shareholders and intend to do that through strong share repurchase programs.
We're committed to driving higher shareholder returns through strong organic revenue growth strategies, along with the strong share repurchase programs announced here.
Next I'd like to provide a high level overview of the four important organic growth strategies.
First earlier this year, we realigned our business around three distinct segments that I discussed here with you today.
People are already people management and people scout.
By simplifying our service offerings and clarifying our branding structure. We also laid the groundwork for an expanded cross selling effort.
These efforts are now well underway.
We're sharpening our focus on strategic accounts.
Developing comprehensive account plans.
And building institutional capacity to Ingrain cross selling as part of the true blood culture.
We expect this will be a very significant opportunity and the good news is only starting just given that fewer than 20% of our top 100 clients are currently engaged with multiple true blue service offerings.
We expect we'll be able to leverage this important cross selling strategy to achieve greater growth throughout the entire organization.
Second is our focus on the <unk> space.
With an industry growth rate of approximately 15% expected over the next five years.
And an adjusted EBITDA margin of people scout of approximately 20%, we like our positioning.
Our capabilities and full cycle recruitment process outsourcing.
And demonstrated ability to successfully handle the largest RPI assignments.
<unk> to distinguish us from the competition.
We are the market leader in North America, which is the main focus of our organic growth plan.
International acquisitions with complement our growth strategy and accelerate organic growth by increasing our ability to compete on multi continent deals.
Third is our focus on productivity based solutions.
Such as Cmos that provide customers with.
Lower labor cost and a fixed per unit cost to help them improve productivity of their workforce.
Our fourth there is their focus on the mobile strategy, which is currently focused on the people ready segment.
With our job stack App, we're creating a next generation digital exchange that efficiently connects workers with available jobs.
Two key metrics, we're focused on this year are the worker adoption and the mobile fill rates adoption rates track what percentage of our active workforce is downloading.
And using the App.
And mobile fill rates track the percentage of orders being filled directly by the digital exchange.
Traditional means.
Unfilled orders.
We've seen steady progress and adoption and mobile fill rates as newly enrolled branches adapt their processes to leverage the power of the app.
The first wave of branches, we rolled out is now posting worker adoption rates north of 50%.
And mobile fill rates north of 10% and.
In other words in these branches one out of every 10 available jobs is already being filled through our digital exchange.
We have several branches where over 50%.
Of their available jobs are being matched directly by the digital exchange.
Job stack, our real time digital exchange to connect customers with high quality workers.
Is completing this rollout across North America.
Now available across 70% of people ready branch service areas job stack has access to a free mobile app available to registered customers and workers.
Workers from people ready as talent pool can respond immediately too.
To job opportunities posted by people are already customers in the fields in geographic areas. They prefer.
And then be dispatched directly to the job site without having to visit a branch.
This transformational matching technology enhances people ready as position as one of the largest industrial staffers in the U S.
And as a leader in revolutionizing the way businesses.
<unk> with workers.
With that I'll turn the call over to Patrick who will share some more details.
Thanks, Steve.
We're very excited about the potential of our digital strategy to create value for our workers.
For our clients.
And for our shareholders.
Our job stack mobile App has the potential to add significant shareholder value.
By increasing our market share through our larger candidate pool.
Through a round the clock dispatch.
And through Compellingly differentiated service in the marketplace.
Because our people ready business generate EBITDA margins in excess of 15% on incremental organic revenue growth. We're excited about the potential of jobs that could be an accelerant in the future.
We began the rollout of the job stack worker App earlier this year.
The worker functionality is now live in approximately 450 branches.
We're about 70% of our overall people ready network.
We expect our results to improve as we also pressed forward with the rollout of our client functionality.
We began piloting the app with clients at the end of the second quarter in 2017 and are receiving positive feedback from those clients.
While it's still too early to quantify the potential financial impact.
I wanted to hear some early indicators that underscore the value creation potential.
First.
Our workers, who have downloaded the <unk> app are both more sticky.
And more active than non job stack workers.
We've been able to retain and dispatch a substantially higher percentage of workers using the jobs that gap compared to workers connected via traditional branch interaction.
This is particularly important development given the tight labor market.
Second clients, who have piloted the value of the additional visibility and quality control.
Pilot clients have been very active in providing ratings for workers placed on their jobs with particularly interesting is that approximately 20% of the clients we've talked to them. It.
Have said they would be willing to pay a premium if their worker pool were comprised entirely of four and five star workers.
Finally, we're seeing a solid percentage of jobs builds via job stack outside of business hours.
This may not translate directly into volume lift since many of these orders may have otherwise been filled during working hours, but it does underscore the greater efficiency.
And satisfaction inherent in round, the clock job and order fulfillment.
Bottom line.
We're extremely encouraged by the early success of our mobile strategy.
And we hope to have even more good news to share in the near future.
And with that I'll turn the call back to Derek.
Thank you Patrick.
For the third quarter of 2017, adjusted EPS of <unk> 60.
It was at the high end of our 55 to 60 expectation.
Driven mostly by higher than expected revenue of $661 million.
Which exceeded the top end of our 645 $660 million expectation.
Total revenue for the quarter was down 5%.
Or down 2% excluding Amazon.
Which was an improvement from the second quarter of this year of minus 9% or.
Or minus 5% excluding Amazon.
We saw widespread improvement in monthly revenue trends across the business.
Between September which is our Q3 exit rate and.
And June which is our Q2 exit rate.
<unk> already improved to minus 1%.
From minus 9%.
People management to minus 8%.
From a minus 10%.
And people scout to plus 7%.
From a plus 2%.
The recent Hurricanes provided about one point of revenue left for the third quarter, which we expect to carry into the fourth quarter.
From a vertical industry perspective.
The retail industry, excluding Amazon and hospitality based businesses continued to perform well for us with low double digit growth.
And we saw improving trends in service based businesses.
Manufacturing continues to be the biggest drag on our growth down mid single digits, which is consistent with the trend in Q2 this year.
Gross margin was up year over year for our seventh consecutive quarter and this quarters results were driven by higher gross margin and our RPM business.
SG&A expense was down about $3 million year over year from the absence of prior year integration and reorganization expenses.
Which was somewhat offset by hurricane related damages and mobilization response costs in the current year.
Turning to the segments.
Already revenue declined by 5% in the third quarter.
Excluding the storm related revenue September was down 3%.
For a strong finish to the quarter compared to the Q2 exit rate in June this year of minus 9%.
Adjusted EBITDA was down 30% as a result of negative operating leverage associated with the revenue decline.
And the storm related costs I mentioned earlier.
People management revenue declined by 9% overall or flat growth on an ex Amazon basis.
The new business pipeline is healthy, particularly in the Cmos business.
But converted at a slower than expected pace in Q3 as customers make plans for the upcoming holiday season.
Adjusted EBITDA was up 31% and related margin expanded by 110 basis points.
Driven by faster growth in our higher margin Cmos business.
And reduce costs in light of lower Amazon volumes.
People scallop performed very well with 10% top line growth.
Underlying.
The growth is a record level of new logo wins.
Proprietary technology advances antitrust reputation in the marketplace continued to differentiate our service offering with new clients.
Adjusted EBITDA was up 23% and related margin up 220 basis points from our continued focus on recruiting process efficiency.
Our balance sheet and liquidity continued to strengthen.
Year to date cash flow from operations was $81 million.
Total debt stood at $135 million, resulting in a debt to capital ratio of 20%.
On a 12 month trailing basis.
Total debt to adjusted EBITDA stands at 1.0.
Acquisitions have played a prominent role in our growth strategy.
For example, the acquisition of <unk> added a new higher margin service offering.
And the <unk> acquisition added scale and efficiency to our core business.
We believe our PL clients will increasingly seek providers that can deliver multi continent service.
Which is why we are pursuing international deals in this space.
They do not need to be large deals.
Just enough to create a physical presence and provide client references.
Aside from this our strategies are focused on organic growth.
As Steve mentioned today, we announced that our board of directors.
<unk> is a new $100 million stock repurchase program.
Cash flow from operations was strong at $129 million over the last 12 months.
And the balance sheet is in great shape.
The new share authorization demonstrates our desire to return more cash to shareholders.
And our confidence in the long term outlook of our business.
Year to date, we repurchased $29 million of common stock for $14 million of which was purchased during the third quarter completing the previous authorization.
Under which a total of $75 million of stock was repurchased at an average price of $15 52.
Turning to our outlook for the fourth quarter of 2017.
We expect the decrease in revenue of 8% to 10%.
Or a decrease of 6% to 8% excluding Amazon.
Once the fourth quarter is complete we will have passed the anniversary of the lower revenue run rate in the Amazon business that was announced in 2016.
Our fourth quarter outlook for net income per share is 36% to <unk> 41.
Or 45 to 50 on an adjusted basis.
Which assumes a share count of $40 8 million.
As a reminder, last year's fourth quarter included an extra 14th week.
And we moved the quarter ending date forward by two days from Friday to Sunday.
To better align with the worst week of our customers.
Revenue associated with that nine extra days was $56 million.
And the estimated EPS contribution for that period was four steps.
Or five on an adjusted basis.
On a comparable week basis, our guidance implies a revenue decrease of 1% to 3%.
Or minus 1% to plus 1% excluding Amazon.
Our business is focused on three simple principles to increase shareholder value.
One <unk>.
Increasing organic revenue growth to drive higher adjusted EBITDA margins.
With a current focus of our mobile strategy at people already we're excited about 15% plus incremental adjusted EBITDA margin for this segment is capable of producing with organic revenue growth.
Too aggressively growing services with higher adjusted EBITDA margins.
Our RPM and productivity solutions continued to perform well and increase their share of our overall business mix.
Three returning more cash to shareholders through share repurchase to further improve shareholder returns.
Okay that concludes our prepared remarks for today, 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, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Jeff Silber from BMO capital markets. Your line is open.
Thank you so much and congratulations on the quarter good results.
You mentioned the impact of the hurricane in the third quarter and you expect some potential benefits going forward is it possible to quantify that and I'm also curious in paas disasters.
How long did this cleanup work last.
Hey, Thanks, Jeff I appreciate that.
Storm based work.
It's got US first it has negative impact because all businesses are shut down during that period of time and then we have a quick impacted cleanup work.
And then obviously the next stages of the longer term.
That involves more skilled labor.
We're through most of the quick impact that comes from the cleanup in those areas and.
And by the way has mentioned that quick cleanup work.
Isn't always the most profitable work either because of the extra costs. It takes for all that additional recruiting so.
We like contributing to those communities. We're glad we're there for them to get them rebuilt and cleaned up as fast as possible, but our long term impact isn't all that great Jeff.
Something that we do and we love to do an and most of that impacts behind us. However that last stages is the rebuild and we look to participate and we're pushing hard to get some long term skilled people out there to help them to help the rebuild in those areas Thats one is harder to quantify.
Are you fine I'm sorry go ahead I just wanted to catch the back end of your question about the impact for the third quarter that was about a point of lift associated with the Hurricanes and we've got about the same amount of lift in our guidance for the fourth quarter.
Okay I appreciate that Derrek.
You mentioned in terms of having to find people to do this work is it becoming more difficult or are you getting sort of new type of folks doing this or are you kind of cannibalizing your existing business to find these people to work on these projects.
Yes, I don't think it's cannibalizing theres plenty of.
Workforce out there to go do general Labor, that's one of the things through the history of our company that with the methods that we use and where we are and how we recruit we can around the quantity of people up almost in any environment. So there is some extra transportation to move people in because those that are impacted with those areas aren't ready to go back to work quickly.
We need to transport teams in to help with the cleanup.
Okay, great and.
I guess shifting gears to job stack.
It sounds like you're really making some progress there I know early on there were some internal issues in terms of getting some of your folks at the branches to adopt it I'm just curious how that's been going how you've been able to overcome that.
Yes. Thanks for the question Jeff This is Patrick.
We made a lot of progress there.
We've got 450 branches now that are that are on the app.
We've got over 400 clients that we've been working with.
We're seeing clients added at a pretty healthy clip. So I think we've gotten past that largely it is it is a pretty significant change effort dose so it shouldn't be underestimated.
But I think we're doing a pretty good job on it now.
We're starting to see some some pretty significant results in terms of the number of associates that are adopting the number of clients that are adopting.
And our internal personnel as well so we feel pretty good about where we're at.
Okay, Great and then just a quick numbers question Derik I appreciate the color on the guidance is it possible to give us any color in terms of gross margins and adjusted EBITDA, that's embedded in your fourth quarter guidance. Thanks.
Yes.
Yes.
Let's see here Jeff.
I can always follow up offline, if you don't have to worry about it.
Well I've got it here.
We're looking for gross margins roughly in alignment with where they were in the fourth quarter of last year, maybe down a little bit there. Steve mentioned, there is some transportation cost and some other things here to service some of those hurricane related work.
Was your question on adjusted EBITDA.
Thank you again.
Yes, the same kind of thing and just in terms of guidance for the fourth quarter.
Yes, we're looking at I'll call it.
Roughly about.
35% to $34 5 million in adjusted EBITDA.
Okay, Great that's really helpful. Thanks, so much.
Your next question comes from the line of Kevin Mcveigh from Deutsche Bank. Your line is open.
Thank you so much and let me add my congrats on the quarter.
Eric you came in at the high above the high end of the range was that kind of the incremental step up of the hurricane work or any other context around that just as we think about it relative to Q4.
Yeah, a good portion of the beat was.
Pushes higher was people scale continuing to perform really strong and some lower corporate expenses.
Actual revenue beat for the quarter was driven by the hurricane related work that we've talked about that provided some extra lift.
However, we had we had some extra SG&A that came along with that revenue some of it.
Normal that you would expect incremental but roughly about $2 million of extra SG&A that came half of that roughly related to damage to our branch offices, which which one of which will carry a portion of the Q4 and just some startup costs mobilization costs getting some are recruiting centers and some other things going so.
That really leaves you with the beat on the people scout results from a little bit higher in revenue and strong performance on the adjusted EBITA margin side.
Got it now is that well some of those costs be insured derrek, where you'll be able to recover them from a carrier.
Now because most of these are they're not any big items at any individual branches. Our branches are pretty small and this is largely going to fall underneath the deductible. So this is this is out of pocket expense for us.
Got it and then just as we're thinking about the new buyback any way to think about the cadence of that and how much of that do you have dialed into the Q4 guidance.
Yes, thanks for asking that question I'm glad you did we don't bake any share repurchase.
Hi, Good afternoon, I was wondering if you could just.
Break down people ready people management and people scout in terms of the the.
The growth on a comparable basis I think I can see what it is but I just wanted to confirm.
How it comes out and then and then I've got some follow ups.
Yes.
Talking about the guidance that we set March for the fourth right. So for example, total as you know minus one to minus three on a comparable period basis. So I'm assuming people readies minus two to minus four on a comparable basis, but I just wanted to confirm that same with people management people scout.
Sure. So what I'm Gonna do here is I'm, just going to give a complete story of the guidance starting at the total consolidated level just so everybody's got it and then I'll go back in and finish off with a question that you asked here Mark great. So on a GAAP basis total company, we're looking at a decline for the fourth quarter and our outlook of minus 8% to minus 10%.
Sent.
On a comparable basis for the total company, we're looking at a decline of 1% to 3%.
Or on an App ex Amazon basis, total company, plus 1% to minus 1%.
On a comparable basis.
For each of the segments on a comparable basis people ready at flat to minus 3%.
People management at minus 4% to minus 6%.
And people skills.
At 5% growth to 15% growth.
You know what the impact is going to be six to 12 months out.
Can you just talk a little bit about the adoption among clients and some of the branches that have had jumpstart the longest.
I think the headline is for every 10 clients that we're talking with three or signing up so.
The adoption rate is pretty high this is sort of like when we go out and talk with the client is sort of like taking a cold water into the desert.
Giving them something that they are really excited about so.
This isn't really a challenge for us in terms of signing up clients signing up workers.
The real challenge for us as an execution, making sure that we're converting that capability into value both for our clients and our associates. So that's the real challenge for us, but I would expect over time, we're going to see increased fill rates.
More positions they are otherwise would've had and more clients than we otherwise would have had as well as workers that are more sticky.
What sort of full rates are you getting out of the ones that are coming across.
Crush dropped stock.
So on average we're running around 10% of the Steve mentioned in his prepared remarks for our highest performing branches.
We're a little bit north of 50% in terms of those branches.
In terms of cool right.
Yes.
In terms of the number of positions that are being filled right I'm asking about the fill rates in terms of the.