Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the TrueBlue Third Quarter 2022 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, Chief Financial Officer, you may begin your conference.

Good afternoon, everyone, and thank you for joining today's call. I'm joined by our Chief Executive Officer, Steve Cooper. Before we begin, I want to remind everyone that today's call and slide presentation contain forward-looking statements, all of which are subject to risks and uncertainties, and we assume no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are described in 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 website at the conclusion of today's call and a full transcript and audio replay will also be available soon after the call. Okay, let's now turn the call over to Steve.

Thank you, Derrek, and welcome everyone to today’s call. Overall, revenue was $576 million or roughly flat compared to Q3 2021. At PeopleReady demand softened, yet we filled a higher proportion of jobs as worker supply continued to improve. PeopleScout results were solid as hiring volumes at our clients were strong, while PeopleManagement trends held steady. Operating income and margin were higher due to historically wide spreads between bill and pay rates as the labor market remained tight. PeopleReady revenue for the quarter was down 4%. While demand slowed, worker supply improved leading to an increase in our job order fill rates. PeopleReady is our largest segment representing 57% of total trailing 12-month revenue and 57% of total segment profit. PeopleReady is a leading provider of on-demand labor and skilled trades in the North American industrial staffing market. We service our clients via a national footprint of physical branch locations supported by our JobStack mobile app. PeopleScout revenue was up 10% compared to a year ago. Demand for RPO services remained strong at existing and new clients due to the high number of job openings. Our highest margin segment, PeopleScout, represents 14% of total trailing 12-month revenue and 33% of our total segment profit. PeopleScout is a global leader in filling permanent positions through our recruitment process outsourcing services. Turning to our third segment, PeopleManagement, revenue growth remained steady, up 4%. Commercial driver services contributed the bulk of the year-over-year expansion. PeopleManagement represents 29% of total trailing 12-month revenue and 10% of total segment profit. PeopleManagement provides onsite industrial staffing and commercial driver services in North America. The essence of a typical PeopleManagement engagement is supplying an outsourced workforce that involves multiyear, multimillion dollar onsite or driver relationships. I will now shift the discussion to our strategies before ending with…

Thank you, Steve. Total revenue for Q3 2022 was $576 million, or roughly flat to Q3 last year. PeopleReady revenue was down, while revenue grew at PeopleScout and PeopleManagement. Lower workers’ compensation expense and a positive spread between bill and pay-rate inflation led to bottom line growth and margin expansion. Net income grew 11% and adjusted EBITDA grew 18%, while net income and adjusted EBITDA margins grew 40 basis points and 90 basis points, respectively. Adjusted EBITDA margin expanded more than net income margin due to PeopleReady technology upgrade costs this year, which were excluded from our adjusted results. Gross margin for Q3 2022 of 27.1% was up 170 basis points. Key contributors included 110 basis points from lower workers’ compensation expense and 100 basis points from bill/pay spreads, which were partially offset by a higher proportion of revenue contribution from our lower margin PeopleManagement business. The workers’ compensation results are from a combination of favorable development of prior year reserves and fewer workplace injuries. Q3 2022 SG&A increased 5% which is less than the 10% increase in Q2 this year due to cost management actions given the current level of demand for our services. Our effective income tax rate was 17%, which was in line with our expectations. Before discussing the performance metrics of each of our segments, I’d like to provide some big picture commentary on how the current environment is impacting our business. Inflation and higher interest rates are clearly causing consumers and businesses to rethink their level of consumption and investment resulting in demand uncertainty for many businesses. Demand uncertainty is translating into future workforce uncertainty for many of our customers which is impacting our three lines of business, albeit in slightly different ways. The demand impact is most noticeable in our PeopleReady business. In a…

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

Thank you so much. Appreciate all the detail you gave in your prepared remarks. Is it possible to get a little bit more color by end market vertical? I'm just wondering if there are specific end markets doing better or worse than others?

Hey, Jeff. Thanks for that question. It's Derrek here and I'll take that question. From a pressure perspective, when it comes to results, the two areas where we're seeing the most of that are in retail and hospitality. Most of that is because we're coming up on tougher prior year comps, but also part of that is because we've seen some softening in both of those markets, particularly retail. To give you some perspective on this, in retail, we were up 16% in Q2. We were down 7% percent in Q3. And our Hospitality business is still growing. It was up mid-single digit, but that's been a really big grower for us for several quarters up over 50%. On the other side of the equation, construction and manufacturing actually held steady. The growth rates or minor decline depending on which one of those industries you pick stayed pretty steady with where it was in Q2.

Okay. That's really helpful. I appreciate that. You also talked a little bit about what's going on in October. I'm just wondering if we can step back into last quarter and talk about intra quarter trends, if possible, about the different kinds of business?

Sure. So for talking intra quarter trends, PeopleScout stayed at steady at about 10% all throughout the quarter. PeopleManagement steady as well. June, July was up 4%, 2% as they exited the quarter and PeopleReady is where we saw the most step down going from minus 2% in July to minus 6% at the end of the quarter. Going into October though, our staffing businesses are holding pretty steady with the typical sequential trends that we would expect. So we haven't seen any softening in the run rate. From a year-over-year perspective, the declines are getting larger. We're running probably about 8% down in the first three weeks of October, but that's not from any softening in our weekly trends if we compare to typical historical patterns. It's more about the prior year comparisons that I pointed out in my prepared comments.

Okay. That's helpful. If I can just sneak in one more. Based on that, I'm just curious what's implied in your revenue guidance for the quarter and I do appreciate you guys giving us revenue guidance once again.

Yeah. You bet. So the midpoint of our guidance for Q4 is minus 10% and the trends that we're seeing in October are right in line with our expectations of where we should be in October compared to the guidance that we gave.

Okay. Great. I'll jump back in the queue. Thanks so much.

Your next question comes from the line of Mark Marcon with Baird. Your line is now open.

Good afternoon. I just want to follow on from Jeff's questions. Just with regards to the midpoint in terms of being down 10%. How would you expect that to break down between PeopleReady, PeopleManagement and PeopleScout? And is all of the -- the one time drag all concentrated in PeopleReady in terms of what you cited?

Yes. PeopleReady will be above that 10%. It will be in the low-teens. PeopleManagement flattish and PeopleScout still so growing. What was the second part of your question, Mark?

Just ensuring that all of the drag from the one particularly large client that you don't expect to replicate, but that's all in PeopleReady?

The vast majority of it is there, Mark. We also had a nice sequential step up in our PeopleScout run rate from Q3 to Q4 as we brought on a pretty sizable customers. So the headwind increases there as well in that segment. But from a total company perspective, the overwhelming majority sits in the PeopleReady business.

Okay. And so PeopleReady exclusive of that drag would be more like down 3-ish?

Yeah. That's right. Excluding that would be down 3-ish to 4-ish.

Is that because your expectation is, hey, we're going to the economy is softening. Obviously, there's lots of uncertainty and so the expectation is that those trends should continue and particularly in retail and to a greater also perhaps in hospitality and some of the more cyclically sensitive end markets?

Well, we don't have a lot of softening built up. I mean, we exited the quarter PeopleReady at 6%. There was a little bit of prior year headwind in there from some of the comps, but we exited that 6%. So we're seeing, going into Q4, it'll be around 3% or 4%. So it's a pretty steady case as far as from what we've seen in October and it's building off of that. We didn't throw a lot in for additional softening. We just try to give it to you based off what we're seeing.

Okay. And then with regards to PeopleScout, sequentially, there was a fairly significant difference between Q2 versus Q3. Were there any end markets that ended up having a change of pace or how should we think about this type sequential trend?

Yeah. I'm glad you asked that question. So PeopleScout was down sequentially $12 million and there's really two things going on there. One, there's less than a handful of clients that reduced their spend in Q3 compared to Q2. However, Q2 was an all-time peak for their businesses. So I would say, it's less off of -- more of coming off of a peak than any fundamental softening in their businesses. Actually, the businesses that I just -- that less than handful of clients, their business looks quite strong. However, there is one client that makes up the other half. I would put this client in the category of being somewhat of a luxury retailer and their business is suffering. They are quite high on inventory and they are facing their own host of demand challenges as consumers shift down to lower cost brands given what's going on with inflation right now.

Okay. And then as we think about just the margin impacts you called out, you obviously had a benefit from workers' comp, which you've had in multiple years, how are you thinking about that impact in terms of the fourth quarter? And are there any considerations that we should put in place for next year as we think about that?

Sure. Well, there's probably three things to think about here. I'm just going to paint this big picture. Some of it will also cascade into a fourth quarter conversation. When we take a step back from our performance this year, I'm going to focus in right here on gross margin. We've had a pretty good year when it comes to favorable development on our workers' compensation reserves. That's helped reduce workers' compensation this year, year-to-date compared to the same period last year by about 50 basis points. Ultimately, that's not something that's sustainable, the prior year reserves. So you could expect to see that go the other way at some point. From a pricing perspective that's been very strong for us. We're running -- there was 100 basis points of positive gross margin contribution this quarter really all from PeopleReady in the favorable built pay spreads that we talked about in the prepared comments. If we were to do nothing and just kind of hold our ground right now, that would probably end up being around 50 basis points for next year. That's just the math. We did nothing. I'm not giving you guidance there. Now obviously, if we get into a deeper darker recession and there's a bunch of job losses, I mean, that's not what we're thinking right now, but that would take to be the case that could go the other way. And then you've got with the PeopleReady dynamic right now with the revenue in decline, our PeopleManagement business is taking up a larger proportion of the sales mix and that lower margin business is having a negative impact on gross margin of about 30 basis points to 40 basis points. So I suspect that'd be a reasonable assumption for that to continue if you continue to have in your estimates. The PeopleManagement revenue trend better than the -- PeopleManagement trends better than the PeopleReady trends.

That's very helpful. And then with regards to next year, how are you thinking about managing your own headcount, own expenses and capital allocation given the uncertainty in the environment?

Well, I'm glad you asked this question. When we're growing, we're investing and when we're not growing, we're making adjustments. And you've seen in our trends this year, SG&A was up 10% in Q2, it was 5% here in Q3 and the midpoint of our SG&A guidance for Q4 to be down 5%. So we'll continue to make adjustments. However, they might not be as pronounced as they have been in prior recessions. I think we've kind of been an industry leader when it's come to cost cuts. And we made $40 million of reductions in the PeopleReady business in 2000, most of those are still with us. So when we take a look at our revenue per employee at PeopleReady, it's running 20% to 25% higher than it did before COVID hit. That sounds great from a productivity perspective, of course, but it also has us wondering if we are -- if that's trending out to be a negative for us in the amount of gross profit dollars, we could be producing in comparison with some of the expense that we're saving on the staffing side. So that's to say as we go into next year, we'll make some adjustments, but it might not be as much as we have in the past. If we get into a deeper doctor recession, we would reevaluate that. But the way that we're looking at it is as we go into recession, our responsibility is to take some actions to help mitigate the drop in profitability. But the big picture is, we need to maximize profit across the whole economic cycle. And we're feeling if think if it's a reasonably shallow recession, you just won't see much of that cost cutting on the PeopleReady side. We may actually make some investments there to fill some positions that we've got open, particularly with our branch managers.

Okay. And what about capital allocation in terms of like buybacks didn't look like you bought back anything during the quarter?

Yeah. From a capital allocation perspective, we're making sure the balance sheet stays strong, but we do like to return excess capital back to our shareholders and we like to do at a favorable prices. So we're going to keep an eye on both of those and make decisions as we move forward. From an acquisition perspective, that's not some -- we're not particularly interested in doing any acquisitions in the staffing side of the business. Our strategies there are really all about making better use of the assets that we've got by digitalizing the businesses. Now over on the RPO side, that's a different story. We would be interested in acquisitions there and increasing our mix of white collar work that we do professional. We have quite a bit of that already. So we really like the secular trends in technology. We like the secular trends in life sciences. So additions there could really increase our street credibility on new deals and we'd be interested in pursuing something on that side for the right price.

Great. Thank you.

Your next question comes from the line of Kartik Mehta with North Coast Research. Your line is now open.

Good evening. This is Jack Boyle (ph) in place of Kartik Mehta. Just have a quick question in going with the demand there. Are you guys seeing any difference amongst your larger or smaller clients in their demand behaviors? If you could give us a little bit of color on that?

I'll go ahead and take that one and see if you want to add any color, feel free. When it comes to larger customers, excuse me, I'm going to clear my throat real quick. Sorry, about that. Nothing like coming down with a bad cold on earnings release date. My apologies. So when it comes to the differences between large customers and small customers, what we're seeing with our larger customers on our PeopleManagement business, our PeopleScout business, is more -- it's less about movements in their use of our services that's been holding pretty steady where we've been seeing more hesitation as new deals. Those larger customers have that are in our pipeline, many have been hesitating -- they're hesitant to make a choice in changing providers with all the uncertainty going on. They don't know what their demand is in some cases and which means that they don't know what their workforce needs are. Now keep in mind those two businesses, we primarily serving customers in their core workforce. They vary their needs somewhat up and down with their core workforce. Over on the PeopleReady side though, we have been seeing I would say equal proportions of softening between both small customers and large customers. And as you know with that business, that's more of a many of the customers use us as a variable supplement there. And so it's one of the first things that gets turned off as things start slowing economically and one of the first things that get turned back on.

Thank you. And just as a follow-up, are you seeing any difference amongst changes in bill spreads among some of the different job positions that you were mentioning just a few moments ago?

Well, our bill and pay rates that we quote, it's all out of the PeopleReady business. And we've been getting equal benefit on both sides of the house with large customers and small customers, but more benefit with small customers. In those particular circumstances, we're often dealing with the business owner, an operations manager versus dealing with a purchasing department. With virtually all customers, we've been getting the pay rates push through that part hasn't been a problem getting it through our bill rates. And we're getting some extra spread with both small and large customers, but a little more with our smaller customers.

Great. I appreciate the color. Thank you.

Your next question comes from the line of Marc Riddick with Sidoti. Your line is now open.

Hey, good afternoon.

Hey, Mark.

So first, I want to thank you for all the detail that you've already provided and you've covered quite a bit between the slides and the prior Q&A. I was wondering if you could talk a little bit about maybe if there are any misperceptions or misunderstands that that you think you're seeing out there as far as what either investors may be thinking of or maybe some of your clients as to what's -- what tends to take place going into a recession and maybe what -- versus what's actually taking place and maybe you could sort of talk a little bit about, if you feel this doesn't folks are off on anything in particular, it would sort of be helpful to hear your thoughts there?

Well, Mark, I'll start off and let Derrek fill in the gaps on some of this, but it's definitely different than different recessions. I think we mentioned that in our last quarter and as we're trying to plan our business and trying to see what our clients are doing. Everyone's just trying to grasp how deep and long this might be. And Derrek just mentioned in his last question that we're playing the card here that we want to bounce back impact. And so as we listen to our clients and the people that we're aligning ourselves with is to be ready for them, and make sure that our business is solid. And so not cutting as deep as we might have in past recessions is really important to us. And that's all based on the question you've asked here is what's going on and how deep it might be and what might be the outcome of this. It's a real mixed signal that growth still seems to be available in some sectors and obviously, in others, it's still a little bit steeper. Derrek talked about retail and they're making some adjustments and not understanding how the holiday is going to hit. But as far as our alignment with our clients, we just have to stay really close in a time like this. And our commitment to our clients and our people through this coming recession is we will stay nimble, yet we're not going to slash like we have in the past. I think our clients are happy about hearing that. Knowing that we will be here, we will be prepared and we're going to be ready to bounce with them, it's good for our shareholders, but it's really good for the client situation that we have. So we don't feel disconnected with our clients and all the information we've shared today is definitely client driven through lots of conversations and staying close to the data around there. I'll let Derrek answer the question more about the street and the investors and if we're misaligned there, but we feel really connected to where our clients are.

Well, Mark, from an investor perspective, I don't think there's any big call outs where I see anything or where there's misalignment. I guess we'll see as we go into the fourth quarter if there's further -- at the beginning of that. I think everybody including the markets, everybody is just looking at information week by week and it's just being one way or the other. But I don't see any fundamental -- fundamentals that are off in our alignment.

Do you think that there's a -- given the mix of business that you have now versus in the past, and do you think there's different flows of information that you're getting now that's more beneficial than maybe it might have been in historical pullbacks?

That's definitely true, Mark, because the size of accounts that we work with is much larger than it's been in any other time. Not only because PeopleScout has grown and PeopleManagement continues to grow even in this tough market, and those serve larger accounts than our average account of people already. So those two things -- those two facts drive the type and size of client. But at PeopleReady in general sales, our national account business has grown more than our small account business really over the last 10 years, 10 or 12 years. So the larger the account, the more sophisticated account manager we have on-site and the more information we get out of those clients and it's easier for us to align and be prepared and with those accounts. So yes, very insightful question Mark that you've asked.

I appreciate it. Thank you. That seems -- its seems to make a lot of sense that you'd have sort of a better seat at the table today than maybe in the past as far as and maybe improving visibility. And then finally, I guess, maybe you could talk a little bit about the pricing dynamic. This was touched on a little bit earlier, but maybe you could expand on a little bit. But if you could talk a bit about the opportunity that may still continue to be out there because, yes, we've got macroeconomic challenges, but there is still sort of this pricing balance that's still taking place and maybe you can talk a little bit more about that?

Sure. I'll take the front part of that. And Steve can jump in if you have any additional color he'd like to add. So we're at an interesting part here in the economy. We've had a couple quarters of negative GDP. We could be in for some more of that next year. Yet here we sit with 10 million open jobs and many of which are lower pay jobs and they're in blue collar fields in which we serve at the PeopleReady. That's where the pricing is coming from. On top of that, you've got an increasing preference amongst employees to work from home. But the types of positions that we are placing can't be done from home, which is putting in even more pressure on an already tight labor pool. So we look ahead -- to the future, we just don't see anything changing that dynamic. Sure, there could be a blip next year, if we get into bad recession. But I'm talking longer term what would change that. We don't see anything fundamentally changing that. So that scarcity of talent, it gives us some more pricing power in these discussions. And we've got a very disciplined team with a very disciplined plan to make sure that we are appropriately pricing our business on the PeopleReady side in scale with the availability of talent in the marketplace.

Very encouraging. I appreciate it. Thank you very much for all the commentary.

There are no further questions at this time, Mr. Steve Cooper, I turn the call back over to you.

Well, thank you, Emma and thank you everyone for joining us today. As you can tell, we are excited about the opportunities ahead to drive growth even in difficult market. But as Derrek was just visiting with you about the continued tight labor markets, we feel well positioned. Now we've got to work through the current situation and when that growth will come. But with the client first mentality, differentiated technology. We really believe we've got the opportunity to grow our market share through the recession, but definitely coming out of the recession with the strategies that we are creating. We appreciate your interest in TrueBlue. Don't hesitate to reach out, if you have any additional questions, and thanks again.

This concludes today's conference call. Thank you for attending. You may now disconnect.