TrueBlue, Inc. (TBI) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the TrueBlue Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. Thank you. Derrek Gafford, Chief Financial Officer, you may begin your conference.

Good afternoon, everyone. Here with me is CEO Steve Cooper. Before we begin, I want to remind everyone that any forward-looking statements made by management during today's call are subject to the Safe Harbor statements found in TrueBlue's press release and SEC filings. The company's fourth quarter earnings release and related financial information are available on TrueBlue's corporate website at www.trueblue.com under the investor relations section. This call is being recorded and a replay will be available on the company's website. Any references made to our organic business exclude the acquired results of SIMOS Insourcing and Aon Hewitt RPO. The discussion today contains non-GAAP terms, including, but not limited to, EBITDA, adjusted EBITDA and adjusted earnings per share. Adjusted EBITDA excludes nonrecurring integration and acquisition costs and processing fees related to the capture of worker opportunity tax credits. Adjusted earnings per share excludes nonrecurring acquisition and integration costs., amortization of intangible assets, WOTC processing fees and adjusted income tax expense to the expected rate of 32%. The exclusion of WOTC processing fees and the use of a 32% income tax rate are changes to the adjusted calculations spurred by the recent Congressional approval of the WOTC program. These are measurements used by management in assessing performance and in our opinion provide investors with additional insights to the underlying trends of the business. Please refer to the reconciliations of non-GAAP terms on our investor relations website for additional information. I'll now turn the call over to Steve.

Thank you, Derrick. Good afternoon, everyone. Today we reported our fourth quarter and year-end 2015 results. Fourth quarter grew 17% to $811 million which included 14% organic growth which was a nice step up from the 8% organic growth in the third quarter. Full-year 2015 revenue increased 24% to a record $2.7 billion which included 7% organic growth for the year as a whole. I'm excited about the strong organic growth throughout the year and especially the strong step up in the fourth quarter. The growth continued to be widespread throughout our operating geographies, with strong momentum in both local and national accounts. We experienced double-digit growth in construction and in our on-premise accounts. Although manufacturing continued to lag, we did see low-single-digit declines versus the slightly higher declines we experienced earlier in the year in manufacturing. At the end of November, we completed the acquisition of SIMOS -- that's S-I-M-O-S -- a leading provider of on-premise workforce management solutions. This acquisition added 3% growth in the fourth quarter. Adjusted EBITDA was $46 million in the fourth quarter, an improvement of 6%. While adjusted EBITDA for the full year increased 23% to $147 million. Our adjusted EBITDA margins declined by 60 basis points in the fourth quarter to 5.7%, mainly due to the investments we made which produced the strong organic growth we experienced, along with the 40 basis points of workers' compensation benefits in Q4 of last year that did not reoccur. During the fourth quarter, we made significant investments by adding local sales and recruiting professionals in several markets which helped produce the organic revenue surge in the fourth quarter. In addition, we experienced increased sourcing and screening costs overall related to a tightening labor market. Our investments for growth also included the early stages of improving our ability to connect with both our current workforce and candidates alike by moving from our texting system to an app built for smart devices. The early stages of this research and development have all been expensed. The fourth quarter adjusted EBITDA margins took a slight step backwards with the high amount of investment made to drive revenue and support our future growth. We're confident we're making the right investments in the right areas and monitor the return on all investments closely. We have pulled back slightly on certain costs to ensure our adjusted EBITDA margins can be maintained at our current rates during 2016. The additional professionals on the ground selling and recruiting, along with the further technology enhancements, will not be walked away from as they should provide long term sustainability in our recruiting and workforce management. However, we will moderate the investments and contain other costs as a balance in the short term. Therefore, the organic revenue trends will likely not be sustained here in early 2016 as we work through the choppy economic environment. And this will also allow us to remain flexible with the increasing uncertainty in the economy. Innovations within our company, along with the additional acquisitions, combine well for our existing business to put us in a strong position to keep a sustained growth trajectory. We believe the RPO market has tremendous potential on a worldwide scale which is why we're so pleased that we can bring on the Aon Hewitt RPO operations into our PeopleScout brand at the beginning of the first quarter here in 2016. We've provided 2016 annual guidance today to help you see more clearly what our forward outlook is once we make it through the beginning of the year, where the investments made for growth and the more volatile labor markets balance out to have a more profound impact on growing EBITDA. For 2016, we're estimating an increase of 30% in adjusted EBITDA on 15% revenue growth. This will result in expanding our adjusted EBITDA margins to approximately 6%. We remain committed to continue to expand our adjusted EBITDA margins while we're experiencing growth in revenue. Both things are important for us to provide improving rates of returns to our shareholders. I will now turn the call over to CFO Derrek Gafford for further analysis on our results. Afterwards, we will open up the call for questions. Derrek?

Thanks, Steve. Revenue for the quarter exceeded expectation by more than $60 million -- $22 million from the acquisition of SIMOS and the rest from organic operations. Compared to Q4 last year, revenue grew by 17%. 3 percentage points of the growth came from SIMOS and 14 percentage points from organic operations which was an acceleration from Q3 of 8%. Staffing services revenue grew by 17% or 14% on an organic basis versus 8% in Q3. We saw improving trends across most industries. Within the branch base business, we experienced a step up in small- to medium-sized customers and double-digit growth with national customers. However, as we exited the quarter, we saw diminished growth with national customers as well as within the retail industry. The on-premise staffing business delivered strong double-digit growth for the quarter and another record of revenue and profit. Shifting to managed services, revenue grew by 15% versus 10% in Q3. Now let's discuss the company's profitability for the quarter. Adjusted EBITDA of $46 million was $2 million less than expected or $4 million less on an organic basis. Higher-than-expected organic gross profit, net of customary variable expense associated with the revenue growth, was offset by $8 million of higher SG&A costs that fall into the following four categories. First is additional headcount. Since the end of Q1 2015, 300 new positions have been added in the branch-based staffing business, predominately in higher paid sales and recruiting positions. 100 of these positions were added in Q4. Second is higher technology costs. We're increasing our efforts to advance the use of mobile technology in our business. Third is candidate sourcing and screening costs due to the rapid surge of demand in Q4 and a tighter candidate pool in certain markets. And lastly, an adjustment to stock-based compensation expense attributable to higher future performance expectations as a result of the acquisitions as well as other miscellaneous adjustments. I'll now provide a summary of the SG&A increase compared to Q4 last year. Total SG&A for the quarter was $24 million higher due to the following items, $10 million of variable expenses associated with organic revenue growth; $7 million of growth-oriented investments, including technology and additional headcount; $3 million of candidate sourcing and screening costs; $2 million of cost related to nonrecurring acquisitions, WOTC processing and stock-based compensation costs; and $2 million of ongoing SIMOS operating costs. On a segment basis, staffing services' EBITDA of $53 million was up 15% or 10% excluding SIMOS. Managed services' EBITDA of $1.5 million was $900,000 less than last year due to a new customer implementation. This implementation has been slower than expected, resulting in a full load of recruiting resources on a lower revenue base. Customer contract discussions are in progress and a favorable resolution is expected in the second quarter. Excluding this customer, EBITDA was $2.5 million higher -- excuse me, it was $2.5 million for the quarter or a growth of 10%. Total company gross margin of 22.8% was roughly the same as Q4 last year. The headwind from a higher favorable workers' compensation benefit in the prior year was offset by lower payroll taxes and successful pricing of new business. Now let's discuss income taxes. In December, the worker opportunity tax credit was approved retroactively for 2015 and prospectively through 2019. The retroactive approval produced a tax benefit in the fourth quarter resulting in an effective income tax rate of 14%. The approval of this program dropped the expected effective income tax rate from 38% to 32%, resulting in additional earnings per share of nearly $0.25 in 2016. We're excited about our recent acquisitions and the value they bring to our customers. SIMOS Insourcing manages on-premise staffing, similar to Staff Management, but outsources a complete work cell within a warehouse, pricing the work on a cost-per-unit basis. The productivity-based pricing model in combination with its process engineering expertise produces a 15% average reduction in customer labor costs. We're excited about the competitive differentiation SIMOS brings and the opportunities to further leverage this know-how in other areas of our staffing business. SIMOS Insourcing was purchased on December 1 for $67.5 million with the possibility of an additional $22.5 million based on 2016 results. Net of the present value of the tax asset, the cash purchase price was 4.2 times forward-looking EBITDA. We expect SIMOS to produce annual revenue and an EBITDA of $185 million and $13 million. Excluding intangible asset amortization, the transaction should add $0.17 to adjusted earnings per share. The Aon Hewitt acquisition solidified PeopleScout's position as a leading provider in the U.S. and significantly advances our strategy to be the global RPO leader. About 90% of the acquired revenues are in the U.S., adding highly respected logos and additional scale, enhancing our ability to win new domestic business. With 40% of the employees located outside the U.S., including hubs in India and Poland, it also extends our international reach and ability to compete on global deals. Aon Hewitt's RPO business was purchased on January 4 of 2016 for $72 million. Net of the present value of the tax asset, the purchase price was 4.8 times forward-looking EBITDA. We expect the Aon Hewitt RPO business to produce annual revenue and EBITDA of $65 million and $13 million. Excluding intangible asset amortization, the transaction should add about $0.17 to earnings per share. Turning to the balance sheet, Q4 finished with $245 million of debt. At the end of January 2016, total debt was down to $235 million due to the seasonal deleveraging of working capital which more than offset the purchase of the Aon Hewitt RPO business. Cash plus borrowing availability was roughly $100 million at the end of January. Looking ahead to Q1 2016, we expect total revenue growth of about 15% or 7% on an organic basis. On a segment basis, staffing services revenue is expected to be up 14% or 7% on an organic basis. And managed services up about 75% or 10% on an organic basis. Adjusted earnings per share is expected to be $0.23 to $0.28. Adjusted EBITDA is expected to be $20 million to $23 million, equaling growth of 10% or a decline of 20% on an organic basis. Please keep in mind that Q1 adjusted EBITDA is a relatively small dollar amount, roughly approximating about 10% of our annual profits, making it a more sensitive growth calculation than other quarters. The Q1 organic revenue growth expectation of 7% is comparable to the growth achieved in Q3 last year, but a drop from the growth achieved in Q4. During January, we experienced a drop in demand within the national customer business and the construction and retail industries. While underlying trends are hard to determine, given the January weather, we believe that there has been some softening in sentimental demand which is reflected in our expectation. Given the change in revenue trends, our cost structure needs to be reduced. We have a plan approaching $10 million of annual savings. We expect about $7 million to $8 million of the cost reduction to occur in 2016, with the benefit starting to show in the second quarter. We have provided a full-year outlook today. Although we do not intend to update this outlook, we believe it is helpful to provide more transparency on our organic expectations as well as the combined company, given the recent acquisitions. We expect total revenue of about $3.1 billion and adjusted EBITDA of $190 million or revenue and adjusted EBITDA growth of about 15% and 30%. These results would expand the adjusted EBITDA by nearly 60 basis points. On an organic basis, we expect revenue of $2.9 billion and adjusted EBITDA of $165 million or revenue and adjusted EBITDA growth of about 8% and 15%. 2016 is a 53-week year and the outlook I just shared does not include the extra week. Although the extra week is the least profitable of the year, it will add about $45 million of revenue and $1 million of EBITDA. However, our discussion as we move through the year will predominately focus on the 52-week period for comparability purposes. Additional expectations for capital expenditures, depreciation and amortization, nonrecurring costs related to the integration effort and other items for both the quarter and the year can be found in the earnings release deck on our website. Strong profitable organic growth continues to be our top priority due to the strong shareholder return and higher adjusted EBITDA margin it produces. Providing our customers with a scalable workforce is a key value proposition of our business model and we're well versed in our ability to scale our own cost structure. We remain committed to advancing the use of mobile technology in 2016. We're excited about the opportunity it provides to increase our competitive differentiation to both customers and candidates as well as lower the cost of our delivery model. Acquisitions continue to be an important aspect of our growth strategy. Our attention over the next six months will focus on the recently completed acquisitions to ensure customers and employees are retained and relevant integration activities are completed to enable future growth. Success with these activities will provide capacity to complete economically priced deals in the future that provide unique value to our customers, yet are complementary to our current portfolio of services. That concludes our prepared comments. We can now open the call for questions.

[Operator Instructions]. And our first question is from Sara Gubins with Bank of America Merrill Lynch. Your line is open.

Could you talk in a little bit more detail about the slowing that you saw in January? How did the small to midsized customers do exiting the quarter and into the year? It sounds like national had slowed a bit, but did small slow as well?

This is Derrek. You know, that was one of the bright spots actually as we went through January with the small- to medium-sized business. To give you an overview just of how trends have played out over the last couple of quarters, in the third quarter, our growth in that area was relatively flat. It bounced up to 5% in the fourth quarter and as we exited January, that growth approached 10%. That was one of the highlights. The softening really was in our national account business -- larger customers, particularly in the retail industry and then construction as well. The construction part is really hard to determine what all that means. It's one of our lowest volume months of the year when it comes to construction, but we certainly saw softening there. We grew at about close to 20% in the fourth quarter in construction and exiting January, that was in the mid-single-digit range. Some of that surely is due to weather, but some of that could very well be to some softening in our fundamentals and that's the way we're approaching it.

Sara, this is Steve. Just to add a touch of summary there, it was really the retail -- large retail accounts that probably created most of the pain which lead to the comments that we've made here about that it might be a bigger softening since it's larger accounts and it's across-the-board pullback. Some of our retail accounts have started closing stores and they're certainly not doing remodels anymore or resets. Things like that have caused the largest thing. The little bit of a slowdown in construction really doesn't have us that worried. It feels like a pretty good pipeline of projects that are out there and the weather was a little bit more serious in January. And like Derrek just mentioned, that's one of our slowest months.

And then I was hoping to understand a little bit more about the cost commentary. You mentioned that you are planning on cutting -- I think you said $10 million in cost and that we'd see $7 million to $8 million this year. Are those costs that you had ramped in the fourth quarter and you are now looking at the outlook and saying that that needs to be pulled back? Or are they coming in other areas and you would have made those 4Q investments anyway? Just trying to understand where that's coming from.

The strategies that we've put in play throughout the back half of 2015 we're sticking with. Moving our organization into more professional recruiters and professional sales teams is definitely a strategy we're sticking with. Moving forward with more technology, especially in the mobile app, that we can move that forward is a strategy we're sticking with. Additional cost cuts -- and the reason we bring them up is we knew that over time that we would have an opportunity to cut back in other areas. And so this just gives us the opportunity to really jump on that early in the year rather than wait until some of these investments are a little stronger. So there's going to be a gradual shift in our entire organization over the next year or two of continuing to move the larger teams in markets, moving some of our brands together -- that's creating some of this. So right now in our contingent workforce, we have it lot of separate selling teams and we're moving those teams so they can sell more than one brand and that we might be able to go to market actually with less brands in the future. So it's things like that are going to help us with the cost containment.

The next question is from Randy Reece with Avondale Partners. Your line is open.

Afternoon. I wanted to get a little bit of a better angle on how much your spending expectations changed from when you gave guidance for the fourth quarter?

Related to the fourth quarter, Randy? Or are you talking about longer term?

Just the fourth quarter. Just trying to figure out how to characterize the big SG&A number in a little more detail.

Yes, that's about -- if we exclude some of the variable costs that just go along with the additional revenue that came post the guidance that we gave, that was about $8 million. About $8 million of costs broken down into those four categories I mentioned of headcount, technology, candidate sourcing and screening. And then a miscellaneous bucket, some of which is stock-based compensation related.

It looks like your core revenue guidance, excluding the acquisition, still looks fairly good versus where everybody was. And between the labor ready business and everything else, I'm curious as to what's acting best right now?

As we mentioned here a bit, January just had a gradual slowdown to it. And we're still growing -- it's just not at the pace we were in the fourth quarter. Obviously in the fourth quarter, we were pretty excited about the trends that were developing and that ramped up from the third quarter. And obviously we've done that at a cost, but we were fairly excited about that. Now, it's early -- we're going off a three or four weeks trend here in January. The weather has been crazy. It wasn't like this in January of last year. Now, it might have been worse in some pockets, so we hate to pull that out too much. Selling at the local area is still a strong suit. We have branch teams in play and they are out at the market. They are selling local accounts and that held up pretty good in January. Most of the pullback really had to do with larger accounts, where -- really in the retail area, where there have been some pretty significant announcements out there actually about large retailers pulling back and not doing remodels and closing some stores and tightening business. It's hard to predict where that goes and how long that lasts and is that how strong of the pullback in the economy will that be. I just made a comment about construction, though, as our pipeline feels pretty good in construction and we're feeling that we can get back on that trend here in 2016. So it's just a little bit choppy here in the first four weeks of the year. And it was hard for us to come out and say that those fourth quarter trends can hold. But we're not cutting back on those teams that drove those results either. So I want to be very clear there, that the cost-containment programs we're putting in play are different costs than the ones that we believe drove the results.

Yes, we're still feeling really good about 2016. So this is just a matter of balance here. Exiting the fourth quarter, the results we put up are -- that's probably outpacing the growth in the market by 3X and dropping from 14% growth to our expectation shared here today for the first quarter is 7% and for the year of 8%. That's a drop in about a turn of that growth. So we like what we're seeing out there. We're still getting good momentum, but in a drop of that revenue growth rate, we just need to make some adjustments here. That's really what our business is about is, it's helping other customers make adjustments to their business and that just requires us to be just as flexible in responding to how we run ours. So still feeling very good about 2016. We're just going to need to approach it a little bit differently than we had thought we were going to approach it three or four months ago.

Is it that you have some locations where margins have fallen off and you need to pull back expenses or is there another way to look at it?

Probably a better way to look at it would be is this was a strategy that was coming. We had a pretty significant branch consolidation program going up through the end of 2014 or partial towards maybe the third quarter of 2014. We stopped that program, where we were closing 10 or 15 branches a quarter, mainly due to worker shortages, that we didn't want to find ourselves in a situation last summer where we might not have enough workforce. Some of the technology is working very well for us. We're able to reach further with that technology and as that goes into play here at the end of the first quarter and we see that result happening in the spring. And that's why Derrek said some of this doesn't get hit and we don't start seeing a lot of it until end of Q2 is with good results on other things to ensure that we have a candidate flow and a good acquisition process for candidates, then we can consolidate some of the real estate we have out there -- some of the markets and the costs and go about that. Really we're talking about lower level customer service employees and we're moving those into consolidated centers. We're moving some of that into larger consolidated warehouses, if you will. Those things are on their way. We’re moving them forward faster than we might have, Randy.

The next question is from Jeff Silber with BMO. Your line is open.

It's Henry Chien calling in for Jeff. I just had a question on your acquisition strategy. You made a number in the past months. Just wondering if you could talk about your current acquisition criteria; if there's any market that you are targeting and just overall your M&A strategy? Thanks.

We've had a really successful M&A strategy over the years and it shifted slightly the last couple years, where we started making larger investments in on-premise companies. And that drove the Seaton acquisition, that drove the SIMOS acquisition. Also along that path, wanted to invest in RPO -- recruitment process outsourcing. So as we started working with larger accounts coming out of the recession in 2010, the two main requests that we were receiving from customers during that period of time had to be can you manage our on-premise accounts or our sites? Can you help us manage these larger workforces? And then lower productivity was coming in often into these conversations and more majorables and accountability about productivity. And that really drove our enthusiasm about the SIMOS acquisition -- the influence that will have on our on-premise business that we've put together. So that's driven -- recently it's about managing large accounts on-premise and then managing their full-time workforce. We haven't done a branch-based acquisition in our contingent business for quite some time -- almost three years now. And so as we look forward -- and you've asked well, where are you going next? We don't intend to go after the branch-based business. We feel very strong about our contingent staffing network across North America and especially with the additional technology we'll have to get a broad reach into the candidate pool. So we feel pretty good there. There could be a little bit further acquisition M&A work in on-premise large account work, gaining specialization maybe that comes with some technology or certain accounts, if you will, to buy into that space a bit more. We'd like to see that double, actually, that on-premise business over the next five years. And so a little bit of investment there. Then really what we're focused on is building out the RPO piece, this managed service piece. And having the opportunity to advance PeopleScout to a global brand is really exciting and so this latest acquisition with Aon Hewitt to bring their RPO business in advanced our game. It moved us into stronger into Canada. It gave us some service centers over in India and Poland. So we can work that business on a worldwide basis with good support. And we're continuing to look for great opportunities to get into Asia and Europe mainly because about a third of the deals going to market in that RPO space are multi-continent deals and we need to be in that space. We're or we feel we're the service leader in that space in North America. We've been voted that by the Baker's Dozen, by HR.com. And our revenue -- the size of our organization in North America has proven us to be the leader. So that's kind of where we're headed now. At what pace? We're going to be very careful about this. We love the deal we did with Aon Hewitt. That advanced the game with some significant accounts on a worldwide basis. And as we move this ball, we'll be careful, but that's directionally where we're headed.

And just to put some financial metrics on there, are there any criteria that you are looking at specifically? Whether it's size or multiples or any criteria you are looking at or you're framing it by?

You know, it's a hard question to answer because we want to be very strategic about it. And sometimes a small partner in a new geography will come with a uniqueness that's worth it. However, in general, our deal size is getting larger and larger, as you can tell, in our last three deals. Matter of fact, of our last 20 deals, the largest three have been our last three. So the significance is necessary -- the amount of effort that our team puts in is the same on these last three deals as it was on even smaller deals. So we're using our own internal resources, especially when it comes to people, better by looking at larger deals. And my goodness, with $147 million of adjusted EBITDA and next year's target being $190 million, it takes a bit larger acquisition to make an impact on those size of numbers. So it will be larger opportunities in general. However, a unique opportunity could come -- be small, especially as we get strategic about how to go about that worldwide brand inside of RPO. I think inside on-premise work, it will have to be of some significance or very unique specialization about helping clients be more productive in their own work and how we might bill. Derrek shared with you the multiples on these last two deals. Very smart acquisitions, very strategic, great returns were going to be made on them. And the sellers were happy. So that's when you get to the best place. So I think you can model these last two or three and say it's going to be in those framework. You go from Seaton through these last two -- there's average multiple of probably 5.5% or 6% in there.

The next question is from Paul Ginocchio with Deutsche Bank. Your line is open.

Derrek or Steve, if you could just maybe talk about how much online shopping or e-commerce helped your fourth quarter numbers, that would be helpful. Also, I've got a few sort of numbers questions, but also let's talk about that sourcing and screening number of $3 million in the quarter. Is that because of tighter labor markets -- just a higher cost of doing business? And are you able to offset at all with the higher bill rates? And I got a couple more numbers questions.

Sure. Thanks for the questions, Paul. Related to the e-commerce business, that has helped. It's helped from the standpoint -- really this is really predicted on our on-premise business. That business has been growing at high teens to 20% most of the year and at least half of that growth in that space. By the way, the purchase of SIMOS also does a fair amount of work in that space. We like the positioning there because we think this is a trend that is going to continue to happen and we want to make sure that we're aligning our work that we do with warehouse operations really around that model. And as you heard from our discussions about the future, in the first quarter, we saw some softening in retail and that was more bricks-and-mortar type of operations that we were involved with.

And Derrek, the move from 8% to 14%, how much of that can you attribute to e-commerce online shopping in the fourth quarter which is obviously with Christmas a big quarter?

Yes. I would have to take a look at this, but it was probably a good couple of points of that, meaning the beat that we had was -- the beat was probably two-thirds in our on-premise business -- let's call it 60% on-premise business, 40% in the branch-based business. And a good chunk of the beat in the on-premise side was related to e-commerce operations. Back to your question about the sourcing and screening costs, there's kind of two things going on. One is a broader challenge that's out there just because of a smaller candidate pool of applicants. So in other words, where it might have before taken five people to screen and put into a job in our funnel, that might be more like seven or eight now. And then of the seven or eight, once we get someone placed, generally sometimes the retention period is not as long for that. So it's not like that all across the country; this is in certain markets. The other part that accentuated this was the seasonal peak in the fourth quarter. Meaning both the surge in demand from what we guided to as well as the peak, particularly in the latter part of the back half of November and into December. This is particularly more pronounced in our on-premise operations. Many of these operations are in semirural locations, so you have an operation that might be going from 2000 to 4000 people in a matter of a couple of months -- two or three months. Sometimes even a greater amount of growth. And that is where the pinch comes in even more so is in these somewhat rural locations to find that number of folks on top of a more challenging or at least a tougher candidate pool. That's partly what drove those costs up, a shortage of candidates and the seasonal surge put together is what drove that.

And then would you be willing to give us maybe the organic growth assumptions baked into those numbers you provided for both SIMOS and Aon Hewitt RPO for 2016, roughly?

Well, let's see. The Aon numbers -- those are relatively flat. There's maybe a slight amount of growth there. That business has not grown as much over the last two or three years. Not because that -- or a lack of value in the services that they provided. There's just been other areas of focus in the Aon Hewitt organization. And believe it or not, this business, as accretive as it is to ours, is actually decretive to that business. And a $65 million business and a $12 billion business doesn't get the amount of attention that it should. Related to the on-premise business, I won't give specifics there, but the growth rate is above that average organic growth rate that we gave of 8%. That was a little bit of direction for you. But it's not as high as it has been in 2015.

If I could just sneak one more in. A very large e-commerce provider recently put in their 10-K -- I heard this from our transportation analyst -- that they now label logistics providers competitors. Obviously you are not a logistics provider; you are a talent provider. But does that change? Does that give you more opportunities? Have you heard that from your client or does that change anything for you?

Well, you are talking about moving goods and transporting goods. We're playing in that business a bit, but it's far, far, far from being material. We're trying to learn how we could do that better with that e-commerce business on the delivery routes and not just in the pick and pack and loading. Yes, it's a growing piece of the business. The e-commerce business is getting so large, they are overwhelming UPS and FedEx and these clients are having to figure out how to get goods out, especially when they are promising one-day delivery or less. So they are working hard on that and we're working hard on providing the labor. And we're awfully curious and close to the strategy of would we be a logistics supplier or not? But yes, we're at the table and we're at the test market. But it's far from material or moving anywhere right now, Paul.

The next question is from Kevin McVeigh with Macquarie. Your line is open.

Derrek, in terms of the headcount additions in Q4, can you give us a sense of where they were focused in terms of was it more legacy businesses or the acquisitions to enhance them?

Sorry, Kevin, you cut out just a little bit. Could you repeat that?

Yes. So the headcount additions that you had in Q4, where were they focused? On the legacy businesses or the newly acquired businesses in terms of the additions?

Yes. We had additions on both sides. Where we had added more than original planned that I referred to earlier in the prepared comments, this was predominantly on the legacy business, so in our branch-based business. So like Steve talked about before, we see some opportunities as we start bringing these brands together as well as the use of technology to consolidate to a certain degree some of the employee populations in our lower paid positions and -- but as a part of that, though, we will have a higher level of folks in our higher paid positions, in the skilled types of positions running our branches and the recruiting and sales area. So that's basically where those positions were placed. Partly because of the increase in demand and then partly for some long term planning as we take a look at how best to run the business in the long term.

And then can you just remind us what percentage of business is related to retail?

Yes. On a combined basis overall, it's about 20% and it's a bit higher in our on-premise business. If we were to just take a look at that on our branch-based business, it's a little closer to 10%. But let's just call it 20% all in.

And then it sounds like if I have my math right, the acquisitions help you by about $0.35 in 2016. And how much -- and I can do the math; I just want to make sure I did it right. How much does the lower tax rate help the year-on-year earnings?

So if we take a look at how accretive the two acquisitions are combined on a 12-month basis -- on a 12-month basis, you're right. Excluding amortization, that's about 35% -- or $0.35. Now that's done on a marginal rate basis basically because not every incremental dollar is at the same rate. Back to your question on -- for TrueBlue as a whole, moving from 38% ongoing tax rate with WOTC involved now and being at a 32% tax rate, how accretive is that to reported earnings per share -- I want to stress reported, not just adjusted. On reported earnings per share, net of the fees, that would approach about $0.25 of additional earnings.

And just so I have it right, the $0.35 on the acquisition, that relates to the $2.65, right? To the adjusted earnings?

That's taking the EBITDA less of those two acquisitions, less -- and leaving amortization out of it, so just taking the EBITDA and taking it at a tax rate -- a marginal tax rate of 40%. And that's what's producing the $0.35 that you and I just talked about.

So the $0.35 is taxed at 40% versus the core business which is 32% now.

That's right. Those businesses do not bring WOTC credits with them. So I'm trying to give you a real mix of just the incremental really due to those two deals.

The next question is from Mark Marcon with Robert W. Baird. Your line is open.

With regards to the expenses that ended up being higher and now they are going to come down which of the four buckets are going to get the biggest reduction? It sounded like we had roughly $8 million more in expenses than expected, but now we're looking at a $10 million reduction. Did I hear that correctly?

Yes. So our SG&A, if we exclude variable expenses for the fourth quarter, was about $8 million more than what we had previously talked about. About $2 million of that falls in a category of items we don't expect to repeat. So that's the stock-based compensation adjustment. There's a few other miscellaneous items that fall in that bucket. That's about $2 million of that. Also there was about $2 million more than previously expected in the sourcing and screening category. Some of those will naturally wean themselves off because not all of that is because of a tighter candidate pool. Some of that was just the more challenged -- particularly in the back half of November and in December in these more challenging markets, particularly rural markets, to recruit the candidates. The other let's call it basically half of that $8 million fell into the headcount and technology cost area. We're not planning on changing anything on the technology costs. We're committed to making this 2016 a year of significantly advancing our game in mobile technology. So we're moving forward with that. The headcount piece -- we may manage some of that through attrition, but there's not a big push to go and take a big chunk of cost out there. We will manage it closely in certain areas. We will manage it smartly and maybe not replace the attrition or pull back maybe in some other areas of the country where the investment just hasn't paid off. The rest of the costs fall into some other categories that Steve mentioned on reducing the branch footprint. We think there are some methods or processes that we can change in how we approach screening candidates to maybe knockout some of those candidates earlier on our own before we use external resources. And some other cost synergies that we can get out of the business that fall into that $10 million of annual spend -- call it $7 million or $8 million of which will hit this year.

$7 million to $8 million will hit this year? In terms of the reduction?

Yes. That's right.

Okay. And so the rest -- the full impact we'll see by 2017?

Yes, that's right. On some of the things that we're moving on, we're already one month into the quarter. Some of these take a couple months to get down the runway on and for them to get into the run rate. So I expect you will start to see some of these benefits in the second quarter and then as we go into the third quarter, you should see a full quarterly run rate. But because of that, not all $10 million of the cost reductions will be captured in this fiscal year.

And then with regards to the RPO client, with the little bit of the resolution coming up, is there any more color that you can give around that, just in terms of what the nature of the discussion is?

Well, unfortunately -- or maybe fortunately for all of you -- the segment is so small it doesn't take much to raise it to a level of discussion in our RPO business. You know, we broke out that segment because it's an area that we plan to grow rapidly. But also a hiccup here or there with a customer which we have across our staffing business routinely, it shows up more prominently here. So I feel like I need to give some explanation to it. You know, this is a larger customer implementation. It's a first-generation RPO account. And so with a first-generation RPO account -- meaning they haven't had RPO in their business -- one, it's already large scale to boot. And on top of that, we're working with the customer on refining some of their recruiting practices to really run this efficiently. So that's part of what has slowed things down here a bit. And they have shifted some of their plans on how fast they are going to implement this through their whole company. So what this means for us is we have built up a full set of recruiting capabilities and recruiters to handle the expected higher run rate of revenue, but we haven't got there yet. So it is a conversation with the customer around what their expectations are. And if they are not planning on taking the engagement to the full level of revenue that we talked about earlier when we landed the deal, then it's just an agreement on pacing down the level of recruiting resources to match the level of demand.

And then with regards to some of the verticals that you're operating in -- you gave great color with regards to national retailers -- on manufacturing, it sounded like in the press release things are going well, but that's counter to what most people are seeing. Can you give a little more color there in terms of what your expectations are in the manufacturing side and how much of a percentage of the business it is at this point?

While Derrek is grabbing that percentage, I'll make a couple comments. No, manufacturing has not picked up; the bleeding is just slowing down is all that's gone on there. And the fact that the clients are just lesser is we're into our fifth or sixth quarter now of declines. So when you get into those year-over-year basis -- it's been coming for a bit and it still here, no doubt.

Mark, just to add on to that and answer your question here, this is a matter when we're talking about manufacturing and the trends improving. What we're really talking about here is getting closer to being flat. So things at least at this point look like they have certainly stabilized. If we were to talk about the trends in manufacturing of over Q2 and Q3, we would have been let's call it high-single-digit declines. As we finished the fourth quarter, we were in low single digit declines. So that's really what we're talking about. Interestingly enough, as we went into January, we really stayed at this level of a single-digit decline. So it didn't worsen in this area or soften more, even given the weather then like we talked about in other industry verticals, though, that did see some of that. To your question on mix, manufacturing for us overall -- all in for the company is a little over 20%.

And then are you seeing any regional differences? Like, obviously, people are concerned about Houston, as an example. Are you seeing any regional variations?

Well, I would say standouts for us certainly for this year have been California and Florida. Those two markets for us make up about 30% of the mix of business on the legacy side and it would be relatively close for the overall company. California has been -- we've been doing exceptionally well there, over 12% during the last about three or four quarters. Florida, not quite to that extent, but almost to double-digit growth there. Texas runs probably 7% or 8% of our business and that has been a laggard for us because of some of the energy-impacted areas. Houston to a degree, but more so for us is some of the role communities that had a more significant oil presence in them. Some other areas, though, like Dallas and others are much more diversified metro markets for us and have been doing fairly well and actually have gotten off to a pretty good start this year. So from a geographic perspective, I think Texas -- we start to anniversary some of those comps that were much more significant during the first half of 2015 and puts us into an area where we might be able to get back to a little bit of growth.

And lastly, can you talk about bill pay spread in terms of what you're seeing? And are there any areas that you would expect to experience organic acceleration as the year unfolds?

Yes. We've been talking to investors about when it comes to our organic gross margins -- setting mix aside; let's just call it the fundamental gross margins of our businesses -- we expect those to remain in line with the prior year. There might be some room for expansion of those gross margins and we think that we need to get some more expansion in those gross margins. Not that it will all drop down to the EBITDA margin line, but because of some of these higher screening and sourcing costs. So it's a big area of focus for us amongst our branch operations in 2016 from a couple of perspectives. One is as our folks go and approach customers in these more challenging markets that have shortage of candidates -- it's arming them with the right information about where unemployment sits, where pay rates sit -- sometimes these have to be increased; it makes the recruiting much easier. And teaching them how to approach the customer with the right information. Most customers -- not all, but most customers are pretty reasonable if we move forward in that fashion and there's solid reasons behind it to talk about why the price should be higher. To a lesser degree, while this hasn't been a huge focus of our business or at least a huge mix in the past, when it comes to conversion fees, that's an area where we think we have some opportunity as well to help offset some of these higher recruiting and screening costs. So that's also a conversation with customers about -- and just having that conversation upfront about those expectations in these tighter job markets. I think both of those to the degree we could get some traction there would provide us with some higher gross margins and help offset some of these SG&A costs we've mentioned and maybe get a little bit of extra of that dropping down to our EBITDA margins as well.

And any areas that you expect to see organic acceleration as the year unfolds?

Well, I think we have to base it on what we saw in Q4 moderated by what we're seeing here in January. And I'd made an earlier comment, I still feel really good about construction. We'd waited for probably maybe six or eight quarters thinking that construction was on its way back and we finally got there in 2015. And the teams that are in contact especially with the larger accounts in that vertical remain confident. So that would be one of our stronger areas that we feel confident in. Questions here on this call today about retail -- especially e-commerce retail -- are strong and we're even picking up new accounts besides our largest. I think a lot of times when we answer questions, we're thinking about that largest account. But there are others doing e-commerce that are starting to rely on us and having stuff ready for daily shipping and maybe even faster than that. So those are good growth things, even in this little bit of choppy environment we're in. Don't see any indication that manufacturing is rushing back, but like Derrek just described, it's flat, so we're good there. As long as we can hold where we're and keep it strong there, we will stay prepared to bring that one back. Retail is kind of choppy right now in some of the bricks-and-mortar. It's just interesting -- I mean, it's a time that some retailers are closing up shop. Amazon announces that they are opening a bunch of bookstores which shocks us all. You never know, do you? You got to stay in tune with the client, what they are doing.

The next question is from Paul Ginocchio with Deutsche Bank. Your line is open.

Just on the workers' comp write-up or whatever it was -- I'm sorry. If you already talked about, I can go read the transcript, but can you just walk me through it? What again exactly what it was and is it related to the fact that you are doing more construction? Thanks.

The discussion on work comp is more about what happened in the prior year. If we take a look at what our run rates, the work comp as a percentage of revenue, it's been very, very consistent this year. Any particular quarter that you went into, it would be 3.6%, 3.7% of revenue. However, in the fourth quarter of 2014, the benefit that we received on prior-year reserves was quite large. And as a result of that, workers' compensation expense as a percentage of revenue in Q4 of 2014 was 3.2%. So this discussion around the headwind is really about -- more about a prior-year event in our comp versus any change in the fundamental mix or cost of our structure right now.

So workers' comp was 3.6% this year?

Workers' compensation expense for the fourth quarter of 2015 was 3.6%.

And was there any writebacks and what percent of GP was that? Or revenue, sorry?

Yes. If we're referring to workers' compensation, any reversals or reductions to reserves established in prior years. There was that this quarter and it amounted to about 45 basis points.

I'm showing no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

Thank you. As we've talked about here today, managing costs and maintaining strong gross margins remains a focus for us as we continue to grow organically. This strategy will provide an opportunity for us to continue to improve our adjusted EBITDA margins from here. And we hold that out as an important measure of growing value for our shareholders. You've heard us talk about a shifting cost structure and that's really going to come as we continue to build out within our staffing services segment two different businesses. One being what you hear us refer to sometimes as our branch network and that's made up of three brands. And as we continue to focus on that and that work and bringing them -- those three brands closer together, they are selling together, they are recruiting together, we're bringing our service engine together. And that's this last set of costs that you've heard us talking about. So there will continue to be a shift as we've added sales people, we've added recruiters and we're reducing the service cost through technology and through consolidated locations. That's going to be a powerful play for us. And as we advance through 2016, the closer we get, you could see us bring those three brands closer together and come out stronger in our staffing services segment as one brand in the local markets. And that's going to be exciting for us. The other part about that staffing services segment is our on-premise business, really led by Staff Management, now fueled heavily by SIMOS, with a couple specialties in there around managing drivers and managing aviation mechanics on-site and on-premise and such. Bringing them closer together is an important goal for us and we're just getting started there. So we're a ways out on that. But bringing that segment together and showing you two different businesses, of the local business and the on-premise business, will be important for us as we advance through the year to share with you that changing cost structure. Balancing it on any given day is hard, but balancing it as we go forward will be important and we'll stay committed to it. We believe that will make us stronger in the marketplace as we simplify our branding and really move that towards something the marketplace can understand better. So that was an important thing you heard a lot about here today and as we go through 2016, you will hear more about. It's most important to know that we will manage these costs as we move through this transition and keep you abreast of the great impact it's having on the top line is the most important measure we can go through because that's sustainable. These are large accounts. We have great sticky relationships with and we're quite proud of. So thank you for your time today on the call, on the questions you've asked and we look forward to updating you as we head into the year.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.