TrueBlue, Inc. (NYSE:TBI) Q3 2023 Earnings Call Transcript

TrueBlue, Inc. (NYSE:TBI) Q3 2023 Earnings Call Transcript October 23, 2023

TrueBlue, Inc. beats earnings expectations. Reported EPS is $0.16, expectations were $0.15.

Operator: Greetings, and welcome to TrueBlue Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derrek Gafford, Chief Financial Officer. Thank you, Derrek. You may begin.

Derrek Gafford: Good afternoon, everyone, and thank you for joining today’s call. I’m joined by our President and Chief Executive Officer, Taryn Owen. Before we begin, I want to remind everyone that today’s call and slide presentation contain 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 our 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 at trueblue.com under the Investor Relations section for a complete understanding of these terms and their purpose.

I do want to highlight one change involving the tax impact of our adjustments when calculating our adjusted net income measure. We will now be tax-affecting all taxable and deductible adjustments using our statutory rate of 26%, versus our prior method of tax-affecting adjustments using our blended effective income tax rate, as we believe this provides investors with more useful insight. For your convenience, we have provided a reconciliation of U.S. GAAP net income to adjusted net income, and adjusted net income per diluted share using this approach for all prior quarters and years back to 2021 on the financial results page under the Investor Relations section of our website. 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. Let’s now turn the call over to Taryn.

Taryn Owen: Thank you, Derrek, and welcome everyone to today’s call. We appreciate you being with us. Revenue for the quarter was $473 million, down 18% compared to the prior year. Our results are reflective of a challenging environment in staffing and recruiting. Across most TrueBlue verticals and geographies, our clients remain cost-conscious and selective about the temporary and full-time positions they choose to fill. Our teams are staying highly engaged to help our clients navigate this uncertainty and to ensure we are poised to support them when their staffing needs expand. We are being proactive with our sales approach by leveraging our playbooks and centralized teams to capitalize on every opportunity, and we have a particular focus on high-growth verticals and under-penetrated geographies nationwide.

Additionally, we are pursuing shorter-term projects and offering flexible solutions to clients in order to meet immediate needs, while positioning us for future expansion opportunities. Along with our current focus, we remain highly committed to our longer-term strategic priorities, including advancing our digital capabilities to position us to gain market share. For instance, we are enhancing our JobStack and Affinix platforms to drive greater efficiency and improve the client, associate, and candidate experience. We’re also committed to expanding both our scope and our footprint. For example, within staffing, we’re focused on high-growth sectors such as renewables and skilled labor placements. Within RPO, we’re focused on high-growth verticals such as healthcare, as well as diversifying into higher-skill placements and more specialized product offerings.

Gaining market share in under-penetrated geographies is also a focus across our driver, skilled trades, and RPO businesses. While industry demand is currently subdued, the long-term outlook for staffing remains positive, and we are well-positioned to capitalize. We have deep expertise in staffing and RPO, a strong footprint, leading technology, and significant resources. Our team is incredibly talented and committed, our values are strong, and we have a compelling mission. TrueBlue provides a vital service, and we remain ready to serve our clients’ immediate and future needs. Before I turn it over to Derrek for further discussion on our results, I want to take a moment to thank him for his leadership and numerous contributions to TrueBlue during his more than two decades with our company.

He has built a digital and people-first finance organization with a deep talent bench that will continue to serve us well, and our entire organization is grateful for his contributions. Thank you, Derrek. I’ll pass the call over to you now.

Derrek Gafford: Thank you, Taryn. Demand for our services continues to be soft as businesses of all sorts face a tough balancing act. On one hand, labor pools remain tight, and businesses recognize how critical retaining talent is in today’s environment. On the other hand, businesses have seen significant increases in pay rates, particularly with positions at the lower end of the pay scale. In an attempt to further manage labor costs, businesses are taking action. they are asking their existing employees to do more. They are also being more selective on the roles they choose to fill and more judicious in their use of human capital providers. These factors, coupled with uncertainty about the trajectory of their future workforce needs, are some of the underlying factors impacting our demand, as well as the demand for the broader staffing market in the U.S. Total revenue for the quarter was down 18%.

Revenue growth for the quarter came in 4 points short of our midpoint expectation, driven by softer than expected trends in August and the first half of September. Looking at the second half of September and into October, we are encouraged to see that the weekly sequential revenue trends for the staffing side of our business are in line with historical patterns. From a net income and loss perspective, our results were roughly break even this quarter, down from net income of $21 million in Q3 last year. Included in our results for the quarter are $2 million of costs associated with our CEO transition. Adjusted net income was $5 million, down from $24 million last year, while adjusted EBITDA declined to $10 million versus $35 million last year.

Gross margin of 26.2% was down 90 basis points. This was driven by a revenue mix increase in PeopleReady’s renewable energy business, which carries a lower gross margin than the blended business due to the pass-through travel costs associated with the business, as well as a decline in the revenue mix of our highest margin business, PeopleScout. Workers’ compensation as a percentage of revenue was higher due to less favorable development in prior-period reserves than we received last year. These factors were partially offset by disciplined pricing in our PeopleReady business, which delivered its tenth consecutive quarter of positive spread between bill rate and pay rate inflation. SG&A decreased 3% for the quarter. Adjusted SG&A decreased 5%, which we believe will also be the case for Q4 this year, excluding the impact of the extra week associated with our 53-week fiscal year.

We remain focused on managing costs to enhance our profitability, while maintaining our operational strengths and readiness to increase our market share when demand rebounds. We recognized an income tax benefit of $2 million this quarter due to the favorable impact of job tax credits. Now, let’s turn to the specific results of our segments. PeopleReady revenue decreased 15%, while segment profit decreased 66%, and segment profit margin was down 520 basis points. The retail, transportation and service industries continue to be our most challenging verticals, while our renewable energy business continues to have solid growth. We are also seeing greater resilience in our small to medium size customers compared to larger, national accounts. Being disciplined with our pricing is an important priority to help cover the inflationary pressures in our SG&A expense.

The business produced another quarter of positive spread between bill and pay rate inflation with bill rates up 6.9%, and pay rates up 6.1%. PeopleScout revenue decreased 32%, while segment profit decreased 41%, and segment profit margin was down 200 basis points. We would characterize the RPO demand environment as soft, with clients continuing to be selective with the roles they choose to fill, some initiating or continuing hiring freezes and others attempting to use internal resources to fill jobs. Also playing into this are employee quit rates in the United States. Quit rates have consistently drifted lower throughout 2023 as more employees choose to remain in their current jobs, resulting in less employee churn for our customers. Despite the margin contraction, the PeopleScout business produced a healthy segment profit margin of 12%.

PeopleManagement revenue decreased 16%, while segment profit decreased 52%, and segment profit margin was down 110 basis points. Now, let’s turn to the balance sheet. Our balance sheet is in good shape. We finished the quarter with no debt, $47 million in cash and over $120 million of borrowing availability. Before we wrap up, I’d like to take a moment to provide additional color on a couple forward-looking items. First, similar to 2016, I want to remind everyone that our fiscal fourth quarter this year will include a 14th week, which is expected to add incremental revenue of $17 million to $22 million and a slight headwind on profit due to the low seasonal volume. Second, we expect a revenue decline of 19% to 15% on a comparable 13-week basis.

While we are encouraged by the fact that the most recent weekly revenue trends on the staffing side of our business have followed historical expectations, it’s too soon to tell whether the trend has staying power. For additional details on our outlook, please see our earnings presentation posted to our website today. As we think about planning for 2024, its comes down to staying disciplined. We have been focused with our pricing and cost management actions while preserving our operational strengths, and we plan to continue this course in 2024. We are also prepared to take additional cost management actions, should the operating environment become more challenging. Now, on a personal note. While this will be my last month as CFO, I will be staying on through the end of this year as an advisor to help ensure a smooth transition.

It has been a pleasure to serve our employees, our customers and the investment community over my 20 year tenure here. Okay. This concludes our prepared remarks. Operator, please open the call now for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jeffrey Silber with BMO Capital Markets. Please proceed with your question.

Jeffrey Silber: Thanks so much. And before I start, Derrek, I just wanted to wish you the best of luck, and thank you for all your help over the past 20 years or so. Wow, it’s been a long time. I know there’s somewhat of a lack of visibility in your space, but the last couple of quarters seem to have been especially tough in terms of the guidance. Is there anything different going on in the business or the competitive environment that’s making it more difficult to provide this guidance?

Derrek Gafford: I don’t think so, Jeff. The way we take a look at the guidance as you’ve noted, the visibility in our industry and particularly with some of our staffing brands and our niches are even less visible than many parts of the staffing market. So the way that we’re taking a look at things is, we take a look at the trends that we see coming in to — setting the guidance into – right, here before the conference call. And we just kind of really call the shot on how things are trending. We don’t try to build in something extra that might turn up or something that might turn down unless we’ve got a reasonable probability of something that’s kind of on our mind or we’re seeing a little sign tick up. And so what we really saw this quarter was, July came out just about like we thought.

And then as we went into August, things really kind of took a step down, particularly in PeopleReady, also at PeopleScout. PeopleManagement management pretty much hung in there. And so what we saw were the retail industry, the transportation industry and to a lesser extent, the manufacturing industry vertical, as we came into August, all three of those actually didn’t live up to what we would normally see from a sequential step-up perspective. That’s really what threw us off the mark, and we didn’t see that one coming. That continued a bit into September, and then we really saw things kind of rally back at the end of September. A matter of fact, as we went into September, all of those verticals that I talked about that took a step down actually took a step forward above their sequential revenue run rate with the exception of retail.

We had a couple of other industries that bounced back nicely as well. And so going into October, we look back at the last five weeks for our staffing businesses, everything has been right on line, with historical sequential trends. And as we set the guidance and the outlook for this quarter that we’re going into the fourth quarter, we have made the assumption that, that’s going to continue.

Jeffrey Silber: Okay. That’s helpful. A few times in the prepared remarks, you talked about cost management. Can we get a little bit more color in terms of where you think that cost management will be coming?

Derrek Gafford: Well, sure. Well, let’s talk about what we’ve done so far this year. And so I’m going to talk about where our cost actions have been this year in comparison with what our budget was coming into the year, which would have been really our outlook that we first shared with you for the year when we talked to you in February this year. We’ve cut out about $35 million of costs, not all of those costs are running through SG&A though, a fair amount of those are running through cost of sales. In fact, we’re down about 1,200 people this year from where we first started, about three-fourth of those in the pep brand. And keep in mind, when I say some of these costs are running through cost of sales because if they are recruiting actions, that’s a cost of sale item for us.