Good afternoon. My name is Shauntel and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2016 TrueBlue 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. [Operator Instructions]. Thank you. Derrek Gafford, CFO of TrueBlue, you may begin your conference.

Good afternoon, everyone. Here with me is CEO, Steve Cooper. Before I 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 and speak only as of the date on which they are made. We assume no obligation to update or revise any forward-looking statements. The company's third quarter earnings release and related financial information are available on TrueBlue's 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. The discussion today contains non-GAAP measurements including EBITDA, adjusted EBITDA, adjusted net income and adjusted net income per share. EBITDA excludes from net income, interest, taxes, depreciation and amortizations. Adjusted EBITDA further excludes from EBITDA, cost related to acquisitions and integration, goodwill and intangible asset impairment charges, other charges and work opportunity tax credit processing fees. Adjusted net income excludes from net income, the adjustments noted in adjusted EBITDA except for depreciation, and adjust income taxes to the expected ongoing effective tax rate. Adjusted net income and diluted shares are used to calculate adjusted EPS. These are key measures used by management to assess performance, and in our opinion, enhance comparability and provide investors with useful insights into the underlying trends of the business. Please refer to the non-GAAP reconciliations on our Investor Relation’s website for a complete perspective on both current and historical periods. Any comparisons made today are based on a comparison to the same period in the prior year, unless stated otherwise. I’ll now turn the call over to Steve.

Thank you, Derrek, and good afternoon, everyone. Today we announced results for the third quarter of 2016 with revenue growth of 2% and net income growth of 17%. Adjusted net income grew 17% to $0.70 per diluted share. Our team delivered growth in revenue and net income this quarter, while sustaining a high level of service quality with our customers. Given the challenging environment with regard to growth, we have maintained a sharp focus on the pricing of our business and management of our operating expenses. Our expense management actions have been decisive and balanced as we remain committed to our long-term technology and growth strategies. We are taking the right steps to preserve our profitability while maintaining our readiness to accelerate growth. This focus, along with the performance of our recent acquisitions, produced 70 basis points of adjusted EBITDA margin expansion this quarter compared to a year ago. I will discuss five areas with you that had an impact on the results this quarter. First, the operating environment has been difficult. Second, our disciplined approach to pricing and expense management. Third, the status of our services with Amazon, our largest customer. Fourth, changes to our branding structure. And fifth, the successful performance of our recent acquisitions. First, the operating environment has been difficult and negatively impacted the quarter. Our organic revenue, excluding the Amazon, declined 3% in Q3. As the quarter developed, our organic revenue trends, excluding Amazon, worsened with July being flat, August down 3% and September down 5%. National accounts have declined to a larger extent than our local accounts. Amazon and just a few other large accounts were the primary driver of the overall decline, whereas our local accounts remained close to flat compared to the prior year same quarter. We did have a large acquisition…

Thanks Steve. I'll begin with an overview of our financial results for the quarter and then add some color on our operating performance by segment. I'll then discuss our liquidity position, outline our financial outlook, and finish off by covering our acquisition and capital management strategies. Total revenue increased by 2% and organic revenue declined by 6%, or a decline of 3% excluding Amazon. Net income grew by 17% and adjusted EBITDA improved by 12%. I want to provide some color upfront on the revenue and EBITDA contribution from Amazon. First in regards to the delivery business we exited in Q3. Year-to-date revenue for that business is about $35 million with $3 million of start-up losses. Second, I'll provide a total revenue and EBITDA set of trends for this customer. In 2015, revenue was $355 million and EBITDA was $24 million. Revenue for 2016 is expected to be $165 million, and excluding $2 million on costs associated with the exit of the delivery business, 2016 EBITDA is expected to be $7 million. Looking forward, the annual run rate is expected to be about $30 million of revenue or 1% of total company revenue and $2 million of EBITDA. Additional details including quarterly data can be found in our earnings release deck issued today. While we continue to pursue large customer opportunities, the Amazon relationship was an isolated concentration of revenue. Our next three largest customers each represent 2% of total company revenue and none of our remaining customers represent more than 1% of total company revenue. Turning back to quarterly results. Total revenue of $697 million was below the bottom end of our expectation. Organic results excluding Amazon for July were flat and in line with expectation, August results declined by 3%, and September further softened to a decline of…

[Operator Instructions]. Your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thank you so much. Wanted to ask about the intra-quarter trends, the decelerating trends from July to September. There was a lot of anecdotal and economic data that actually showed things improved towards the quarter. I know sometimes that data is misleading, but I'm just wondering, what you think happened specifically, especially compared to where we were at the beginning of the quarter? Thanks.

Yes, those are gradual but they were consistent going from flat to 5% organic fall-off. And it's interesting, Jeff, when you compare economic data, the timing is not exact of when manufacturing jobs might take a downtick or an uptick and same with some of the construction job activity that happened during the quarter. But we definitely see it over time, and it may be off by a couple of weeks. It might be off by as much us a month. But what’s reflected in the temporary held numbers and especially our mostly industrial short-term project numbers happens quickly. When those other numbers drops, our numbers drop. And again there might be a two or three week lead way or tell-off as those numbers move but they are not always exact.

Right. And you specifically just cited some weakness in the other national accounts besides Amazon. Can you give us a little bit more color what was going on there?

Yes, there were some fairly big projects in the fourth quarter that drove some of those numbers and it started towards the tail end of the third quarter last year, and that drove some of it for sure. But in general, we’ve seen larger accounts being more cautious during all of 2016, and the hiring in small accounts still continue to be at not a brisk pace but an acceptable pace on small accounts. And we've seen that both from our temporary help contingent jobs that we place but also in our RPO space where we’re hiring the - doing the full-time hiring in our RPO space, we've seen those largest accounts reduce their orders starting really in the fourth quarter of 2015, and thank goodness there is enough company still shifting to RPO it’s driving new customer growth but the existing customer growth, especially in those large accounts has fallen off a bit. So it’s kind of that part of the cycle where the large companies are tightening first. They've held back on their own hiring and they've held back on some of their temporaries. We haven't seen large layoffs yet but we've definitely seen some cautionary tells or signs in the largest customers.

Okay, and then just one more quick one. I know it's still early in October, but can you discuss what's happened so far in October? Thanks.

Yes, so month-to-date results through October is included in our guidance. Excluding Amazon, that decline has picked up to about 7%, so a couple of extra points. However there are comp moving from - prior year comparison moving from September to October got 3 points worse, so that's not to be expected actions. We take a look at seasonal trends just stripping away the percentages that I’ve shared with you, where we are actually performing a little bit better than we had expected once we ended September. So it's still early on. That's just three weeks of data that gives you a little bit of color.

All right, I appreciate the help. Thanks so much.

Your next question comes from Sara Gubins with Bank of America. Your line is open.

Hi. Thank you. Good afternoon. Do you think that the trends that you're seeing, excluding Amazon, are really all cycle-related or are you seeing any strategic or structural or comparative changes in any of your end markets?

Yes, I think it's definitely cycle-related, and as I just mentioned talking to Jeff, that we've seen it mostly with our large accounts first that maybe they are planning further in the future and they send this signal earlier than small accounts but there has definitely been a slowing from - over the last four quarters in large account from the fourth quarter through what we've just reported here in the third quarter. At the same time, smaller accounts are plugging away fairly good and small-to-medium businesses are doing better than the large ones as far as using more contingent labor. As far as the - are the end markets deteriorating? I think it's just too hard to tell right now. There is so much mixed data in what's going on and we serve so many projects that approximately half of them are downturn as a project ended and our client didn’t pick up a new project, whether that is opening stores or closing stores on the retail front or some of the energy projects that come and go. We've seen projects end and the new next project just didn't start. Now it's hard to bleed in and wonder or know for sure whether that’s cycle-driven, Sara, or whether that's just some other factors in their business.

Okay. And could you remind us of your business, how much is focused - from a revenue perspective, how much is large company versus smaller?

Yes, I'll give that information to you here. So if we take our business and split it up between large and small, it's about half and half; half large, half small customers. The mix changes a little bit in our branch-based business to be more towards small size customers but I’ll just remind everybody here, it - for somebody to make it into the large customer account for us, it just needs to be someone with a geographic footprint that can be serviced nationally. We have quite a few customers here in the $500,000 to $1 million range that we would actually put in the large customer account. But maybe some others that you might follow in the industry, they would definitely consider that to be small to medium-sized business but that's the split, about 50-50.

Great. Okay. Thanks very much.

Your next question comes from Kevin McVeigh with Deutsche Bank. Your line is open.

Great. Thanks. Hey, just - I don't know if this is possible to do, but the guide looks like it's about $100 million miss relative to where the street was. Derrek, if I heard it right, it seems like the run-off in Amazon is about $100 million relative to what you guys had kind of initially - the initial revision in terms of - I thought it was going to be around $250 million, now you're coming in at $166 million. So, I mean, is this truly Amazon and is some of this that retail effect you’ve been talking about on the remodel side as opposed to the cycle? Just trying to understand that a little bit, and I guess, my other question at a high level, why wouldn't you guys pre-announced?

Okay, so a few questions in there. I'm going to take it reverse order and then ask you a clarifying question here, Kevin.

Okay.

So on the pre-announcement, that's - we generally haven't done a pre-announcement. We don't set a precedence for this in setting an announcement. There is some that go other ways on that but this wasn't a dramatic miss, certainly during - beneath the low part of our guidance. But most importantly when we announced our results, we want to be able to talk with you all about it and provider a lot of color and transparency around it. So that's just basically our process. Back to your question on the guide, could you repeat that? I wasn't quite certain if you’re talking about our previous annual guidance or our Q4 guidance or Amazon?

Yes. So the Q4 guide, if I pick it up right, it will take the range of $670 million to $686 million. I think it was around $775 million, and I thought maybe I'm wrong that you guys were kind of modeling about $275 million in annualized revenue from Amazon and now it looks like that’s coming in at about $166 million.

Okay.

So, I mean, it's not one to one but it looks like it’s about $100 million adjustment to Amazon and that's kind of the miss. So is it primarily that, and some of the retail coming in or is it really the kind of the cycle turn, and I guess - we’re just trying to figure that out. And then the Amazon, when did that come about because it seems like there has been a lot of moving parts around that contract?

Okay. Yes, thanks. I understand better now, Kevin. So let's talk about a couple of pieces on Amazon. I'll go down that track. And I'm glad you asked and I'm going to provide even some more color here around Amazon because I think it will be helpful beyond what you’ve asked.

Okay.

So in 2015, we did $355 million of revenue with Amazon. When we talked with you all at the beginning of the - or at the end of our first quarter and release our results to give you news that they were going to be downsizing the use of our services in their fulfillment centers, at that time we said our best estimate for the year is $205 million of revenue. Okay? So, where it will shake out right now is about roughly $165 million. So that's a $40 million drop, and most all of that’s occurring in the fourth quarter. Part of that, call it, maybe a third of that $40 million is related to the delivery station business which we got news on that during the mid part of the quarter, and so that's come out of our forecast. And then the other two-thirds of that $40 million drop, let's call it $25 million, is related to the fulfillment centers and that's just Amazon using less of our services for a variety of different reasons. So you got about $40 million adjustment for the annual amount that we gave you, and all of that’s occurring here in the fourth quarter. While we’re on this topic, just to remind everybody, we gave a forecast next year, basically our run rate forecast, as is now, of about $30 million of revenue and $2 million of EBITDA. In our earnings release materials that we sent out today, you'll see also we gave the revenue on a quarterly basis in there, so you can take this $165 million that I just mentioned and break it by quarter. But I also want to provide you with the EBITDA by quarter, and I'm going to do that right now. I think it's helpful for you to have this and we want to make sure that we’re as transparent as we can because I know this kind of shifts can make it challenging in understanding where things are going. So I'll give this to you by quarter here in 2016. First quarter of ‘16, EBITDA was roughly $5 million. Q2 of ‘16 was roughly flat. Q3 of ‘16 was $1 million of loss, and in Q4 for ‘16 we are expecting about $2.5 million of EBITDA in the guidance that we gave you. And as a point of comparison, Q4 of ‘15 was about $11.5 million of EBITDA, so there is about $9 million of EBITDA overhang in Q4. I think it's also important to give you, what - well, I gave you what Q1 of ‘16 was, that’s $5 million. So really what we have here - you can do some of your own calculations here but we've got a couple of quarters here of overhang EBITDA-wise until we get into the second quarter of 2017. So let me pause there, Kevin. I think I got most of the Amazon question you asked and then some. Hopefully that hit the mark.

That's very helpful. And then just my last one, I'll get back in. It looks like - is it fair to say the lower tax rate helped earnings EPS by about $0.16 because I think I was modeling around 32%, looks like you came in at $0.13, so was there $0.16 that helped on the tax rate?

Well, you're talking on raw EPS, not our adjusted number, right, because our adjusted number that we shared with you just keeps that at a flat 32%.

Okay. So the $0.70 is adjusted. It’s for the 32%.

Yes, that’s right. The $0.70 that we reported today has our tax rate at a flat 32%. It doesn't have benefit in there.

Got it. Thank you, Derrek. Thanks Steve.

You bet.

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

Good afternoon.

Hi Randy.

I guess I'm in the same boat as everybody else, wondering about how to isolate the weak spots in the business. Are there any geographic differences in your business trends? Is there any way you can identify regions that are any significantly different than the company average in terms of the way they trended through the third quarter?

Yes. I hit it from mostly an industry vertical perspective and gave color there, Randy, because that was the best way to kind of highlight some of the unique points. If we took a look at it by geography, I mean, I was - I went through this and did some evaluation around it, and I mean, for the most part it was somewhat consistent with the trends that we saw. I mean, I'll give some directional color here. The West Coast comparatively if we were talking what it is now versus what it was Q1 or Q2, slightly weaker. The Midwest probably somewhat that way, although the trends there are just quite choppy. Same with the Northeast. Southeast and Southwest have been, all things considered, pretty resilient. So that gives you a little bit of color from that perspective. Our revenue miss that we had this quarter of roughly $25 million beneath the low-end or that be $25 million actually from about our midpoint, we - about $5 million of that was in SIMOS. That was just new customer timing coming on. That acquisition is doing really well. They are still growing, call it high single-digit compared to ‘15, so still growing quite nice. The other $20 million was really in our branch-based staffing business, not our on-promises business. That came in as expected. And excluding Amazon that business has been pretty growing nice. I mean, it's still growing mid-to-high single digit really all year long. I think one of the underlying trends that we are seeing in the business whether it's our branch-based staffing business, whether it's on-premise, whether it's RPO, same customer revenue has just been sluggish. So where we are experiencing growth, it's from competitive takeaways particularly in the staffing side, on-premise, same with RPO or in RPO because of new first generation customer, meaning customers that haven't used RPO before but I think the underlying factor across all parts of the business is things have been - on a same customer basis, quite sluggish.

The strategy to rebrand at this time - can you give me a sense of timing of how you're going to stage this out and what it might cost next year?

Yes, this is something that we've been working on for quite sometime, actually even before the Seaton transaction in our specialized staffing businesses to bring these together. Mainly for that point that I mentioned earlier that customers were getting a bit frustrated that TrueBlue had two or three different brand calling on them and offering services and looking like a competitor or not being clear. We look at it from the lost opportunity where almost every customer can use all of those services, and when we approach it properly with the right service angle, we were right. So we've tested this in multiple markets. We’ve brought it together in stages. Some of the very first stages were answering the question, can all of these services be sold together? And several years ago, we started putting our sales force on this task and it's moved from a test basis to a full roll-out already where our sales people that are out in the marketplace can sale Labor Ready, CLP and Spartan. That's not a difficult task. The second question was to say, well, can we recruit these candidates from the same perspective? And that one was a bit tougher. We found out that the specialization within the recruiting needed to be protected and taken care a little more, even to the point where - when we were going to go out as one brand we were going to need to add more recruiters to be able to recruit these various skill sets and talent levels for clients. And even going back to a year ago when you heard us talk about adding more recruiters, it was really a preparation for this rebrand where we were going to be selling and operating as one. The third question was, well, can we operate…

[Operator Instructions]. Your next question comes from Mark Marcon with RW Baird. Your line is open.

Hi Steve. Hi, Derrek.

Hi Mark.

First is just a follow-up on that last one. So would you expect by Q3 that everything will be up and running in terms of the new brands, and then what are you anticipating with regards to some of the legacy Labor Ready-type workers being distinct from the CLP-type. How exactly do you do that?

Yes, so you said Q3, did you mean Q4 or did you mean Q3 of ‘17?

Q3 of ‘17.

Okay, yes. Yes, we will be completely rolled out by Q3 of ‘17 for sure with those branding. It's going quickly. Everybody has some of the branding up and running, and there is just certain pockets that we’re not recruiting skilled workers in, and there are certain pockets we’re not doing light industrial manufacturing recruiting. We're just doing general labor. So this is really more of an opportunity to expand our services into those pockets and so the roll-out takes that long to get recruiters up and running in all markets. The question of how do we segregate or keep the general labor separate from the skilled and it really comes from our recruiting base. We're going to keep branches open and that’s really more dependent on how the mobile app works and whether we have enough workers coming to us through the mobile app not based on branding. So the fact that these offices are open and the old Labor Ready office will now be a recruiting center for general labels under the PeopleReady name and we'll keep as many of those recruiting centers open as we need to, to recruit that general labor until we know we're getting enough out of the mobile app. As far as skilled workers, they are really recruited through a full-time recruiter. Someone that builds relationship with them and stays in contact with them and communicates when the job openings come to them and knock [ph]. The skilled worker is not one that comes to the branch often. They’re used to pick up a paycheck or a timecard but we've taken care of that with other forms of technology. So that the skilled worker is already being managed remotely, and so they’re really not being blended in with the general labor right now. And so it's really those - the old Labor Ready offices remaining open as recruiting centers for PeopleReady.

Okay, great. And then with - I mean, you said you would be done by the third quarter. Could it actually be done by the second quarter of ‘17?

Yes, and really what we talked about done there is when they are using the combined system.

Right.

And it does - yes, that's what we’re checking the box.

And in every branch being branded appropriately?

Yes. So yes, it could definitely be done by the end of June.

Okay, great. And then just going to Amazon, the underlying reason why they decided to go a different way relative to what they previously indicated was what - like how did they describe it, what's what was different in terms of their new expectations relative to what they previously expected?

They haven't shared a lot with us. What we do know and what we've seen from being in meetings with them, it's part of a broader strategy to in-source many functions that they had previously outsourced, especially within regard to shipping and delivery, that they would have more control over that and not be subject to providers, possibly to pick up some profit margin, not a lot there as we've disclosed. But the main thing I think is control and knowing that they are controlling their own processes more. So in-sourcing previous things all the way to where they stand with UPS and FedEx and wanting to control delivery right to the customer. So it's just part of a broader strategy that they've been implementing, and tested a few things here and there, but fairly quickly at the temporary labor aspect.

Do you sense that integrity is being similarly impacted?

Yes.

And then, how does this influence how you're thinking just about in terms of future sales efforts? For a number of quarters we've heard small and medium-sized companies doing well, national is a little bit tougher. Does that shift like how you're thinking about where to focus?

Well, just as when we came out of the big recession, we noticed larger accounts were growing and we had a fairly big ramp-up that we had to do. We weren’t established well with the big sales force and national account team that could handle the level of demand that we saw large customers dealing with. We really started getting on our feet with the Seaton acquisition because they handle large accounts so well on that on-promise business. We often said during that ramp-up of large accounts in 2011 and ‘12 though we had not walked away from our ability to service small-medium businesses in the local market. We kept our branches open. We kept teams there. All those sales per employee had decreased and sales per branch had decreased. We stuck with that strategy. So similar today, we’re not losing customer account, what we’re losing is purchasing dollars of each account. So the revenue per account is dropping but the number of counts aren’t dropping. So it is a bit of a challenge because we want to stay true to that strategy that we can take care of large accounts. And so we’re going to stick with that strategy, we're not walking away. Where you invest and it's a little faster to ramp up or easier to ramp up and down the local market of hiring salespeople and hiring recruiters on the aegis, it’s not as easy on the large accounts because there is less people handling those accounts. So bottom line is staying focused on both, Mark.

Okay, great. And then obviously everybody is going to be trying to come up with numbers for next year. As we think about this, it sounds like the expenses aren’t going to ramp up materially because of the rebranding. How should we think about what the run rate gross margin percentage would be? Obviously it's going to be impacted on a seasonal perspective, but as we think about losing the Amazon revenue and some other puts and takes, how should we think about that?

Yes. Well, we haven't given any guidance for ‘17. I think that’s a tough one. Well, let's go this way. I think a good way to think about this is - and it’s why I wanted to give you the Amazon numbers is to give you the revenue and the EBITDA and understand this EBITDA overhead. So with the revenue and EBITDA numbers from Amazon, I think you should be able to kind of work where you need to go at least on an EBITDA basis, Mark. I get that there is a lot of noise here in the gross margin line but what I recommend you doing is you taking a look at 2017 as remember what our comp drops to in Q1. So organic growth, excluding Amazon, our comp in Q4 of ‘15 was 11% growth, which we are up against this Q4, and then in Q1 or ‘17, it's up against a growth rate of 4%. So you can kind of do your own extrapolation of where the business from a revenue perspective would go ex-Amazon without, and project the revenue ex-Amazon. And I think you could back into your EBITDA forecast with a little bit of the math that I gave you today.

All right, thank you.

Your next question comes from John Healy with Northcoast Research. Your line is open.

Thank you. Derrek, I wanted to ask a little bit more - I hate doing this, about the Amazon relationship. When you talk about the $2 million run rate of EBITDA going forward, does that assume any sort of, what you say, revenue - I mean, cost absorption by finding additional customers or additional big customers. I remember a number of years ago when you guys had the Boeing kind of transition, you kept a lot of the infrastructure in place and redeployed it. Does that $2 million assumes some redeployment, or is that kind of an apples-to-apples number?

John, could you clarify which $2 million you're talking about right now?

I believe in the slides you guys had a slide that talked about $2 million in EBITDA contribution kind of run rate.

Yes.

I was assuming that meant $2 million of EBITDA contribution on a ‘17 basis versus the $30 million in revenue you're talking about there?

Yes, so what we are basically saying is if you take the revenue that we would have ongoing with Amazon right now, and just kind of clear the deck, that's $30 million of revenue and $2 million of EBITDA. So put another way, if nothing changes in our relationship with Amazon, that's basically what we would be expecting for 2017.

Okay. That’s great. And then I wanted to ask the down 5% to down 8% organic growth that you guys are talking about. What would that look like on just a pure placement basis? Would that be worse than that, or are there some things with the mix that are causing the revenue numbers to maybe look different than the placement numbers?

Well, I don't have it broken out by placement but the main thing that would be different between placements and the revenue number would be bill rate inflation. So probably a better way to think about is maybe not placement but hours. So we've been having bill rate inflation of about 4%. So whether you want to use placement or hours, that would be a factor you'd want to put into place in making your - really to answer your question.

Okay. And then just last question, with the $2 million service relationship you guys have on the RPO business. When does that hit next year? Is that in the first half or the second half?

Say that one more time?

I think you guys had a $2 million benefit in 2016 from the shared service relationship with Hewitt. When does that fall-off? Is that in the first half of next year or second half of next year?

Yes, it's pretty evenly spread. So what John is referring to is in our slides we've said how much the RPO revenue will be this year and the EBITDA. EBITDA of $17 million to $18 million, but there is a couple of million dollars of windfall benefit in that from just some favorable pricing from a transition services agreement that our cost of doing some of those services will be higher. So that $2 million will be roughly evenly split by quarter across ‘17.

Okay. Thank you guys.

Yes, and I'm going to provide one other piece of information here that Mark asked on gross margin about what our blended gross margin would be going forward. Probably the main piece of data to know here is what the gross margin for Amazon has been? And it’s been roughly 15%. So we've given you our 2016 estimate for the Amazon revenue this year that will be in our results roughly $160 million to $165 million of revenue, and that's come down at a gross margin of about 15%. So I think you can use that to do some back out math to get to a new run rate.

There are no further questions at this time. I will now turn the call back over to Steve Cooper for closing remarks.

Thank you. We appreciate you being with us today and asking these questions and showing the interest. We'll update you towards the end of the fourth quarter on our results, so thank you.

This concludes today’s conference call. You may now disconnect.