Ladies and gentlemen, thank you for standing-by, and welcome to the TrueBlue Second Quarter 2020 Earnings Call [Operator Instructions]. I would now like to turn the call over to your speaker today, Derrek Gafford. Please go ahead.

Good afternoon, everyone, and thank you for joining today's call. I'm joined by our Chief Executive Officer, Patrick Beharelle. Before we begin, I want to remind everyone that today's call and slide presentation contains several forward-looking statements, all of which are subject to risks and uncertainties. And we assume no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are described in today's press release and in our SEC filings, could cause actual results to differ materially from those in our forward-looking statements. We use non-GAAP measures when presenting our financial results. 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. 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 Web site at the conclusion of today's call and a full transcript and audio replay will also be available soon after the call. With that, I'll turn the call over to Patrick.

Thank you, Derrek, and welcome, everyone, to today's call. We appreciate you joining us this afternoon as we all navigate these unpredictable times. I want to thank our employees, associates and clients for their outstanding efforts to safely serve the needs of our communities and essential businesses over the past several months. We will continue to face revenue challenges until the economic recovery from COVID-19 gains greater momentum and clients are more fully back on their feet. But our access to reduce expenses are paying-off, while allowing us to help to maintain our profitability and balance sheet strength. Turning to our second quarter results. We experienced a significant decline in the demand for our services during the quarter. Total revenue was down 39% and we posted a net loss of $8 million or $0.23 per share. We saw moderate demand improvement toward the end of the quarter, which continued into July. In light of these trends, we expect the second quarter to be our trough. Though full recovery will take time and the pace of recovery may vary by segment. On that note, let's turn to our segment results. PeopleReady is a leading provider of on-demand labor and skilled trades in the North American industrial staffing market. PeopleReady's revenue was down 43% during the quarter and we saw a modest intra quarter improvement with revenue down 39% in June versus down 46% in April. PeopleManagement is a provider of contingent on site industrial staffing and commercial driving services in the North American industrial staffing market. Revenue for PeopleManagement was down 23% during the quarter and snap back well as the quarter progressed with the top line down 16% in June versus down 30% in April. And comparing PeopleReady and PeopleManagement’s performance, there are two key points to note. First is…

Thank you, Patrick. Total revenue for Q2 2020 was $359 million, representing a decline of 39%. We posted a net loss of $8 million or $0.23 per share and adjusted net loss of $4 million or $0.12 per share. Adjusted EBITDA was a loss of $5 million, down from a profit of $34 million in Q2 2019, primarily due to lower revenue and gross margin. Gross margin of 23.2% was down 340 basis points. PeopleScout contributed 240 basis points of compression with 80 basis points from severance and 160 basis points from client mix and lower volume. Our staffing businesses contributed another 100 basis points of compression from unfavorable mix and from pricing. While bill rate inflation was consistent with our trend over the last couple of quarters, we saw an increase in pay rates that were necessary to attract associates given COVID-19 health concerns and supplemental federal unemployment benefits. We do not expect gross margin compression in the back half of 2020 to be as pronounced as it was in Q2, which I will discuss more in my future outlook commentary. Turning to SG&A. I'm pleased to report that our cost management strategies are on track. The quick actions we took in March reduced expense by $29 million or by 23% compared to Q2 2019. We had an income tax benefit this quarter of $13 million, which equates to 62% effective rate on our pretax loss of $22 million. Given our losses this year, we expect our income tax benefit rate to stay elevated this year due to the semi fixed nature of work opportunity tax credits and the CARES Act, which allows us to carry back pretax losses to periods when the federal income tax rate was 35%. Beginning in Q2 2020, we will not be making any…

[Operator Instructions] And your first question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Thank you so much. I appreciate the framework that you gave in terms of your outlook. But looking last quarter, I believe you gave us some information regarding potential revenue changes based on potential changes in GDP. Does that framework still hold, have there been any changes?

What we found is and we thought might be the case is that the history that we were looking at, it didn't have any at least much at all of this type of significant revenue decline in the regression analysis that we did. So if you'd applied that to most GDP estimates, it would have put you in the range of a revenue decline of about 60%, which is of course significantly more than the 39% that we posted this quarter. So, I think you got to treat that with some skepticism. But as a directional estimate, you could probably still use it but maybe knock down the impact by a third and that would be one guide post that you could use. But we elected not to provide that, again, because we felt like it would be over magnifying the revenue decline looking forward, particularly in comparison with where we posted this quarter wouldn't have made much sense.

Derrek, in your remarks, I think you said something about the contraction in the second half not being as bad as we saw in the second quarter remodeled by segment, I know you gave a little color in there. But where would we see I guess the rate of improvement or the rate of things getting less worse and which are the three segments?

Well, a big piece of it is going to be in the RPO group. So, there's two things that's going on in our gross margin related to RPO that will step itself down. One is the fact that when it came to doing some of the headcount reductions, those did not all occur at the very beginning of the quarter. Whereas with our staffing groups, most of those did. With the RPO business, we had to treat that client-by-client and talk it through with each of our clients on what they were really expecting for the year that we were thoughtful about the headcount reductions to make sure that we didn't peanut butter those reductions across our client mix, and we really tailored to each client. So what that did is it delayed some of the headcount reductions when it comes to recruiters. So, that's a piece of it. Also, with Boeing that we used to serve the headcount or excuse me the profit reduction there that we were facing is a headwind of about 50 basis points in Q2 and about 25 basis points in Q3, so that also steps itself down. And then the severance, we had 80 basis points of severance. I'm speaking at an enterprise level related to the headcount reductions that we had in RPO. So you take all of that and take a look forward, the pick ups that you see in the gross margin will mostly be in the RPO area for PeopleScout.

If I could just sneak one more in and then I'll get back in the queue. Specifically on Labor Ready, you cited the pace of lagging a bit because of higher exposure to hospitality, I think we all understand that. But you also cited construction and I guess we've seen, you know, kind of a mix bag in terms of construction and recovering throughout the country. I would've thought you might have seen trends get a little bit less worse because of construction. If you could just comment on that that will be great. Thanks.

Well, that could be a possibility as we move into the back half of the year. So we saw, as we went through the quarter, improvements in most all of the industries with the exception of construction. So keep in mind that with construction, about two-thirds of our mix there is non-residential and about a third residential. So no doubt the June building permit news that came out was very positive. So that was permits, although, residential has had its share of some good news even in the amount of investments that’s taking place in the country. So for us, so when you think about non-residential, don't think about office spaces in down town. Oftentimes a good portion of this is not in residential that surrounds communities that are being built. So, if the residential trends continue to do well, we would expect to see more business coming than we're serving right now on the non-residential space.

Your next question comes from Mark Marcon with Baird. Please go ahead.

With regards to PeopleScout, I missed the -- what we exited the quarter in terms of the July month to date. Do you have any data for that?

We don't, Mark. We don't do our billings weekly there. We just do them monthly. But I can say that for May and June, or excuse me, yes May and June for PeopleScout, we were at 54%. So, it's going to trail a little bit here until some of the hospitality and airlines turn around. Or what we've also seen before is we've seen quarters where we've been down significantly as much as 15% or 20%, and then two quarters later flip back to 15% growth. So it doesn't take a lot as far as client activity, a couple of big wins to either flip it back around to the upside or flip it to the negative it's pretty choppy. But what we can say right now is that the pipeline that we've got in here has been pretty steady with what we saw at the end of last year. There's not anything that's significant on the horizon that would change the trends, or we give some outlook towards that at least as we ended up the quarter.

So if we take a look at June that would probably be a reasonable guess for like where the third quarter could end up?

I mean, I think that would be a reasonable guesstimate. We're not providing any guidance but we haven't provided anything that would suggest otherwise. When you take a look at our other businesses, you've got more of a trajectory to look at improvement. Whereas our PeopleManagement business in April down 30%. We ended the quarter in June down 15% where that 30% was in April, so 15 points of improvement and month-to-date in July down 12%. The PeopleReady trends are quite encouraging here at the end of the quarter. We saw 7 points of improvement between June and April. And through the first three weeks of July, we saw 6 points of improvement month-to-date versus what we saw in June. So almost as much improvement in the year-over-year trend between month-to-day results in July versus what we posted in June. So [Multiple Speakers] encouraging results and the most recent trends for PeopleReady.

Derrek, do you think that that sort of trend could potentially continue, or how are you thinking about kind of the recent and obviously the the COVID base counts and hospitalizations are changing by the day. Have you seen any sort of change in terms of like how clients are talking about things as, there was the recent resurgence and in some states, it also looks like there might be some leveling off and maybe pulling back. So you do have a rapid response business. To what extent are you seeing changes real term?

Yes, there certainly is a lot going on out there, isn't there? A lot of factors going on. Well, the part as we saw the cases rising that concerned us the most was our exposure to Florida, Texas and California for PeopleReady, that makes up about 35% of the business. That said, if I take a look at the last week of where we ended the quarter for Q2, so week 13, and for each one of those states and look at where we came in, in week three of July, the July year-over-year decline for each of those three states is better than it was for the week that we ended the quarter. And the week that we ended the quarter was no anomaly there, it was a pretty steady decrease throughout the month of June. So hard to say, Mark. As I saw those rising, I thought we might see a bit more impact in those three states, have not seen anything reverse course yet in those three states. And I would say if you took a look at our top 10 states, the statistic that I just gave about week three and PeopleReady being better than the last week of the quarter, was true for virtually all of those, unless you had a unique issue of a lost customer or a big customer that had cut demand. But the underlying trends for those top 10 states were directionaly on par with what I just talked about for California, Florida and Texas.

And it was great to see the debt covenants restructured. Can you talk a little bit about what you were seeing, you did a good job in terms of collections. We typically harvest AR, when these sorts of situations occurred. Any change in terms of collections, in terms of how that progressed through the quarter, any signs of stress among the client base, or how do you think about cash flow coming into this quarter?

Well, let me just hit -- briefly hit the the covenants and then I'll talk about that collection pattern. We did move to a change in covenants for the next four quarters. There's a couple of different covenants, but the main one is there’s an asset coverage ratio. So, you take your accounts receivable times 60% on the numerator and the amount of debt, or the amount of borrowings that you have outstanding, which is going to be debt and letters of credit done on the denominator, and that needs to be above one. So, that gives us a lot of flexibility in our covenants. It's a favorable covenant to have in a time where the profitability levels are lower. So that just gives us more cushion and breathing room, even though we have plenty of room as it is right now. When it comes to the collection side, we've been really pleased with what we've seen. We have had in our PeopleManagement business, some of our more well-capitalized customers stretching payment terms out, either because in some circumstances we had some terms that said they were -- it's 30 days and they said, hey, that's just not best practice. We're changing it for all of our vendors to 60, or some where they have more elongated supply chains and they're getting stretched, so they stretched our terms. But what I would say in those circumstances, we don't see any systematic risk to that portion of the credit profile. Where we have arguably the most risk is in our PeopleReady business, because of the small business proportion, highly proportion mix of the business that exists within that business unit. There we saw DSO only increase by about a day. So overall, DSO was up by four days predominantly because of those PeopleManagement situations that I just mentioned but the PeopleReady DSO staying up about one day. That compares to, if you go back to 2009, our DSO was up about five days. There's about 30 basis points more of bad debt expense. So hopefully, that gives you some thoughts on credit risk, collections and the cash flow cycle.

Great, thank you.

Mark, this is Patrick. I just wanted to follow up on the question that you had about clients. One of the things that we're seeing is new types of engagements that we had seen in the past. We've mentioned in our prepared remarks around some bounce back strategies that we had developed, particularly targeting retailers that had needs to widen isles and reconfigure their facilities to be more socially distant for their customers to keep people safe. And we've seen some pretty sizable wins kind of late in the second quarter. And part of that’s driving what you're seeing in PeopleReady improvement in July versus the exit rate for the quarter is there is some demand coming from engagements that we had seen in the past specifically around social distancing and reconfiguration. And so, that's been a bright spot for PeopleReady business.

[Operator Instructions] Your next question comes from Josh Vogel with Sidoti and Company. Please go ahead.

I apologize, I hopped on late. So if any of this is a repeat for you, my apologies. Looking at your end markets and client basis, as well as your own internal operations. Can you give me a sense of what percent is operating virtually today? And are there any lessons being learned where you maybe able to maintain this virtual component longer-term?

Well, Josh, I'm not sure I fully understand the question. If you're asking about us being able to operate virtually all of our corporate staff or operating virtually. Our branches though are open for business and are on sites through PeopleManagement are open for business. And what we've been doing though is we've been leveraging technology, particularly our JobStack technology and our digital on-boarding, to engage with our associates in a less in person way and a more digital way and put them to work. We've also put in place some pretty innovative approaches to recruiting. In our PeopleManagement business, we've run dozens of, what I would describe, as sort of drive through job fairs where people drive up, we hand them an iPad, they fill out the information, we do a quick interview while they're in the car and just with the window crack and we've been hiring a lot of people. In fact, we've seen 4 times as many people hired from our drive thru job fairs versus what we would normally do during a regular job fair. So, we're innovating in terms of how we're engaging candidates and how we're engaging clients. And we're obviously able to do that in a modified way today versus pre pandemic. I don't know if that answers your question or not though.

No, that's perfect Patrick, thank you. And that kind of leads into my next question, being able to kind of reduced reliance on the branch structure or the real estate footprint. Are you finding that there's any pockets of opportunity in certain markets where you can scale back the branches and continue to engage through the technology in a more digital way?

Well, to date we've not closed any branches and that was very purposeful on our part. But, I'll get to the thrust of your question, which is from a longer term perspective, the crisis is testing our approach to how we run the business, particularly in PeopleReady. Previously, we wouldn't have been willing to run a ReopleReady branch with less than three people. And now we're exploring different approaches. And finally, we're able to achieve some operating leverage, especially in urban areas where we have branches that are clustered. We're also expanding our centralized delivery efforts, our virtual processes, our enhanced digital solutions and all of which, in my view, position us very nicely to take some substantial cost out of our branch network overtime. But what we're not doing is closing branches today. And the reason for that is, in the last recession, we closed a lot of branches. And one of the things we learned is that if we close a branch, it becomes hard to open it up customers don't forget that you had a branch and then you close it down, and it just becomes hard to get it all started up again. And so instead what we're doing is we're keeping our branches open now, preserving that revenue stream and then laying the groundwork through some of the digital capabilities we have in the virtualized processes, as well as centralized delivery and support that's going to allow us to take some costs out in the future. And that's really a multiyear journey, that's not something that you'll see massive results in in Q3 and Q4. But in the coming years, it will absolutely be material.

And I saw the comment in the slide presentation that you're tracking competitors’ closures at PeopleReady. And so when I think about that, are you seeing a meaningful amount of competitors closing in key markets? And if so, is there anything you can maybe quantify with regard to how that's improving your candidate pool, maybe what it look like, or what it looks like today versus a few months ago?

Yes, we've got a formal tracking mechanism for competitors. And the numbers up to date are not huge. We've got over 30 closures that we've been tracking, mostly from mom and pop type companies that weren't particularly well capitalized and a 30%, 40% revenue hit puts them out of business. And so, we've certainly seen that. And then what we're doing is we're approaching their clients, let them know that we'd like your business. And we've had some nice wins come out of it. I wouldn't say it's been enough to move the needle in a significant way, but it's early days. And my view is that we're going to continue to see pressure on the industry, particularly some of the smaller mom and pop type providers that just aren't as well capitalized as some of the big staffers. And so, it's primarily the smaller companies and we've had some early success but I wouldn't describe it as material yet.

And lastly and you probably already did cover this. But can you maybe give a cross section of how results are trending across each industry over the past month or so relative to, or your end markets versus what you saw in Q2 and what you're seeing today?

Why don't we have Derrek take that, he's got the details.

Well, when you take a look at our industry trends, I would say the one that has moved the least is our construction business. So our construction business overall for the company, which is really primarily driven almost entirely actually by PeopleReady is down 48%. And so throughout the quarter, everything it was for that part of the business was down in the 40s, which might be a little surprising with some of the new news that has come out on construction, improving trends, particularly in the residential space. It's something that we briefly talked about, Josh, was that most of our mixed there is on the non-residential side, not necessarily office buildings but manufacturing facilities, warehouse facilities and oftentimes, businesses, retail businesses and other support surrounding residential development. So we'd expect that one to improve more as those neighborhoods get built and more non-residential gets built around those neighborhoods. With the rest of our business units, in manufacturing, transportation, services, we saw improving trends in all of those businesses. Retail not so much an improvement, but it's been a standout really all quarter long. Retail for us was down 2% for the quarter, which was really driven by a couple of main areas. There's a lot to this. But one is help in frontline operations of retail with surges around grocery and other industries where we've been supplying labor within the store. And then also on the, supporting the distribution of retail products. Particularly in our staff management business, the retail aspect there is very ecommerce driven, so we actually had growth in retail there, which it was all coming from distribution operations.

[Operator Instructions] There are currently no further telephonic questions at this time. I’ll turn the call back to management for closing remarks.

Thank you, operator. I'd like to just take a moment to say how proud I am of TrueBlue’s employees and associates, to how they’ve risen to the challenge so admirably during the pandemic. They’ve just done a tremendous job serving our over 100,000 clients and really appreciated. And thanks to everyone listening in to the second quarter earnings call. We'll look forward to chatting again next quarter. Have a great week everyone and please be sure to stay safe. Thank you.

This concludes today’s conference call. Thank you for joining. You may now disconnect.