Brett Maas – Investor Relations-Hayden Rick Coleman – Chief Executive Officer Cory Smith – Chief Financial Officer.

David Lavigne – Trickle Research Good morning everyone. And thank you for participating in today's conference call to discuss Command Center’s Financial Results for the Third Quarter Ended September 28, 2018. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator Instructions] As a reminder this call is being recorded. I would now like to turn the conference over to Brett Maas, of Hayden IR. Please go ahead..

Thank you, operator. I'd like to welcome everyone to Command Center's third quarter 2018 earnings conference call. Hosting the call today are Command Center's CEO, Rick Coleman; and CFO, Cory Smith. Please be aware that some of the comments made during our call may include forward-looking statements within the meaning of the federal securities laws.

Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward-looking statements.

These statements involve risks and uncertainties regarding our operations and future results that could cause Command Center's results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements and risk factors contained in the Company's earnings release and in its filings with the Securities and Exchange Commission, including without limitation that most recent Annual Report on Form 10-K and other periodic reports, which identifies specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements.

Copies of the Company's most recent reports on Forms 10-K, and 10-Q may be obtained on the Company's website at www.commandonline.com or at the SEC's website, at www.sec.gov. The Company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

Also note that on this call the Company will be discussing non-GAAP financial information. They are providing this information as a supplement to the information prepared in accordance with the Accounting Principles Generally Accepted in the United States or GAAP, G A A P.

You can find a reconciliation of these metrics to the reported G A A P, GAAP results in the reconciliation table provided in the Company's earnings release. I would like to remind everyone on this call that this call will be available to replay through November 21, starting at 1:00 P.M. Eastern today.

A link to the website replay of this call was provided in the earnings release, which is also available on the Company's website at commandonline.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of the Command Center is strictly prohibited.

Now I would like to turn the call over to CEO of Command Center, Rick Coleman. Rick please go ahead..

Thank you, Brett. Good morning and thanks to all of you for joining us. The third quarter again demonstrated our ability to deliver consistently strong profitability and return capital to shareholders. While delivering these results, we simultaneously made substantive improvements to our operating platform.

This will remain our focus into 2019 and encompasses comprehensive changes to our hiring, training, compensation and benefits practices, all of which are designed to position us for future revenue growth and continued profitability.

We've also methodically been evaluating ways to maximize performance at each of our 67 branches through an increased sales presence, effective account management, and improved local safety and staffing practices.

During this rebuilding period, our Board of Directors is continuing to actively evaluate a range of strategic alternatives to increase shareholder value. As we noted last quarter, in late May we began our efforts to strengthen our field management team.

This initiative involved clarifying reporting structures and adjusting compensation parameters for positions that have a direct impact on our revenue and profitability.

We've replaced the leadership in quite a few of our branches and we're helping these new leaders succeed with an improved comprehensive training program and stronger headquarter support.

In addition, we're focused on maintaining and operating and reporting structure with clear and manageable expectations that align our people, their incentives, our customers' needs, and our company's goals.

A reasonable and achievable bonus structure is now in place for our branch employees and our field service managers appropriately incentivizing their success. Our HR team has raised the bar in our efforts to identify and attract high quality, high performing leaders to fill vacant revenue producing physicians.

This process will take time, however, we believe the steps we're taking will enhance the level of service and value we deliver to our customers, which will in turn enable us to generate even greater long-term consistent returns for our shareholders. We also continue to manage our cost structure in line with our revenue.

SG&A for the third quarter was up nominally year-over-year, representing the cost of recruiting new field level leadership and the impact of more competitive compensation plans designed to attract and retain higher performing employees.

Despite periodic fluctuations in business opportunities across the industries we service, Command Center continues to operate profitably and generate cash on a regular basis. Because of our diversity, we're able to operate effectively in both robust and slow economic cycles and consistently create shareholder value.

While Command Center is built for consistent profitability, those profits don't always come from the same sources. Our baseline staffing opportunities mostly consist of relatively small, short-term, on-demand staffing assignments. But these are often augmented by longer term opportunities and short term, high volume project work.

As a result of our ability to continuously capture these varying revenue sources, our overall business is solid with durable earnings power designed to weather economic fluctuations. That said, the tight labor market is operating in a period of record low unemployment.

Low unemployment generally benefits us as a tight labor market makes it challenging for our customers to find and attract appropriate candidates for the positions we staff, making outsourcing a more attractive option. But we're now at a level where it's also sometimes challenging for us to find appropriate candidates.

Additionally, the tight labor market is driving somewhat higher wages, as well as upfront recruiting cost to onboard new field team members. We experienced some year-over-year margin compression this quarter.

The biggest portion of this reduction was caused by higher third quarter payments on workers' compensation claims and relative fluctuations in the claims liability estimate provided by our independent, third-party actuary. Together, these represented nearly three quarters of our year-over-year gross margin differential.

Since this is such an important topic, I'd like to elaborate for a moment. One benefit for our customers is that we provide workers' compensation insurance for our employees. This means that we need to estimate our aggregate workers' compensation liability and make appropriate approvals.

The amount accrued is determined by many factors, including the type of work, historical trends, and average medical cost. Every quarter, we compare our actual results with our estimates and true up our accruals.

We also employ a Tier 1 actuarial company to provide a third-party check on our estimates and in fact it is their estimate that we ultimately book. After reviewing our current open workers' compensation claims, we believe there is nothing out of the ordinary related to anticipated costs over the life of these claims.

As has been demonstrated historically, the future liability estimates will ebb and flow and should not necessarily be taken as an indication of a trend, either positive or negative. The balance of the year-over-year gross margin compression was related to higher temporary worker wages and onboarding costs, as I mentioned earlier.

To be clear, we do not believe our current gross margin or EBITDA margins are indicative of our normalized levels. Rather, they are due to workers’ compensation costs fluctuations this quarter and our decision to invest in our staffing platform to drive higher revenue and higher profitability over the long-term.

The reliable performance of our business model combined with very low capital requirements enables us to enhance the value of our company through strategic capital deployment. And during the second quarter we continued with our share repurchase program.

Since the Board approved the current $5 million program in September of 2017, we've repurchased approximately $2 million worth of our common stock in open market transactions.

With $3 million remaining under the authorization, we plan to continue repurchasing shares of our common stock as part of a comprehensive capital allocation strategy, provided market conditions are favorable. As we strengthen our operating platform, we also continue to monitor acquisition opportunities.

As part of this management and our Board of Directors routinely consider these potential capital allocation opportunities. However, I reiterate that acquisitions are not a current priority for us and we are instead focused on improving the effectiveness and value of our existing operations.

We believe the existing branch footprint can support significantly more revenue and this is why we are actively investing into unlocking its potential. The Board continues to maintain a standing strategic alternatives committee and their mission is to identify and evaluate opportunities to create and unlock value for our shareholders.

As we all know, there are a number of different ways to create our unlock shareholder value. The committee is looking at every opportunity and not discounting any potential tactic or strategy moving forward.

Because their work is ongoing and by its nature sensitive, we don't anticipate answering many questions about this process, the timeline or potential outcomes With the current industry landscape and overall macro economic conditions as the backdrop, we believe we have a highly scalable business and are well-positioned for continued profitability.

We have a solid service delivery platform that supports the scale of our business with room to grow organically or through acquisitions, a strong balance sheet with ample cash, and abundance of working capital and insignificant debt, and a business model that generates cash for reinvestment or return to shareholders.

And as always, I'll conclude by thanking our dedicated team of employees and field team members for their ongoing commitment to exceptional customer service. I'll now turn the call over to Cory Smith, our CFO, to review the financial results.

Cory?.

Thank you, Rick. And Good morning everyone. Revenue in the third quarter of 2018 was $26.3 million, compared to $26.7 million in the third quarter of 2017. The increase of 1.5 – sorry the decrease of 1.5% is attributable to higher than normal turnover in sales position due to increased competition in the job market related to low unemployment rates.

Gross margin in the third quarter of 2018 was 24.5%, compared to 26.9% in the third quarter of last year.

This relative decrease in gross margin was primarily due to increased workers' compensation expenses caused by increased claims payments made in the third quarter of 2018 and a favorable fluctuation in our workers' compensation claims liability in 2017, where there was virtually no fluctuation in 2018.

Selling, general and administrative this quarter were $5.6 million, compared to $5.5 million in 2017, representing a modest increase of $146,000. This increase was primarily due to increased recruiting costs and internal salaries and benefits which were partially offset by lower bad debt expense and lower legal and professional fees.

Net income in the third quarter of 2018 was $546,000 or $0.11 per diluted share, compared to $851,000 or $0.17 per diluted share last year. Adjusted EBITDA in the third quarter of 2018 was $0.9 million, compared to $1.8 million in the third quarter of 2017.

This decrease in adjusted EBITDA was primarily caused by lower gross profits due to decreased margins as previously discussed. Turning now to the 2018 year-to-date results. Revenue through the third quarter of 2018 was $73 million, compared to $73.6 million in 2017, a slight decrease of 0.8%.

Gross margin over the same time period was 25.1% in 2018, compared to 24.6% in 2017. Selling, general and administrative expenses through the third quarter of 2018 were $18.2 million compared to $16 million in 2017.

This increase is primarily due to nonrecurring expenses totaling approximately $2.2 million, which are comprised of $1.5 million expense related to an increase in the reserve on our workers’ compensation risk pool deposit and receivership, approximately $565,000 of compensation expense related to executive severance and $100,000 settlement payment related to our recent proxy contest.

Excluding these nonrecurring expenses, SG&A increased nominally the 21.9% of revenue through the third quarter of 2018, compared to 21.7% in 2017. We recorded a net loss of $108,000 through the first three quarters of 2018, or negative $0.02 per diluted share, compared to net income of $1.8 million or $0.35 per diluted share in 2017.

Included in the 2018 net loss, is the $2.2 million in nonrecurring expenses previously discussed. Adjusted EBITDA was $2.9 million through the third quarter of 2018, compared to $3.6 million in 2017.

Moving to the balance sheet, cash and cash equivalents, including restricted cash totaled approximately $6.3 million as of September 28, 2018, compared to $7.8 million at the end of last year. This change in our cash balance is primarily due to the repurchase of our common stock.

During the third quarter of 2018, we repurchased approximately 164,000 shares of our common stock at an aggregate price of roughly $949,000 resulting in an average price of $5.80 per share.

This recent activity brings the program total to approximately 359,000 shares repurchased since September of last year at a cost of roughly $2 million under the current $5 million repurchase program. All repurchase shares have been retired, and there is an additional $3 million remaining under the current authorization.

Since the original planned inception 2015, we have repurchased a total of approximately 871,000 shares at a total cost of just over $4.9. I would like to note that even as we utilized cash to repurchase and retire shares, we continue to maintain sufficient operating capital. And with that I'll turn the call back over to the operator for Q&A..

At the time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from David Lavigne, Trickle Research. Please proceed with your question. David, your line is now live..

Oh sorry I had on mute. So Rick I think you used the term reasonable and achievable bonus structure. Did I get that? It was something like that. .

Yes, hi Dave..

How are you doing? Sorry, I got lost here because I turned my mute – I had my mute on..

That’s alright..

Does that sort of suggest to me that it wasn't reasonable and achievable before or am I overstating that?.

No, I think you're right. There were a couple of components in the bonus plan that was put into place in 2017 that was having a negative impact in the early part of 2018. And it had to do with budgeted targets for each of the branches, revenue targets. As I think you know by now a lot of our revenue comes from project work.

So it's very difficult at the branch level to assign a revenue goal based on a previous year's results. So some of those goals had been built into the targets as a result of branch managers and branch team, we're not able to achieve them. And at some point they just quit trying or they leave the company..

Okay, I'll look back. So with the workers’ comp they're actually – it sounds to me like there were actually more claims. So I mean I understand the issue of estimating it, but as Cory sort of referenced that there were actually more claims. .

No, it's not a matter of more claims. Claims were kind of in line with what we've seen in the past. It's just a matter of the actual payments against those claims, which are very difficult to predict. They have to do with medical costs and things. Some of them that were paid were claims that were initiated, three to five years ago..

Okay.

Can you give me a little bit of sense, I think, everybody that looks at the business, and I think if you're looking around, the one thing that everybody should be concerned with, at least in my view is just this notion of kind of wage pressure, I understand how maybe that can be beneficial to you at some points and then maybe not so much in others.

And so I'm kind of thinking – I'm kind of wondering what your sense is of the net impact of that on may be an ongoing basis? And I guess maybe as an extension to that question, maybe it's the same question, but, if you're experiencing higher wage pressure, what is your ability to ultimately sort of pass that cost onto your customers? And is there kind of a lag in that somewhere where, maybe you can initially, but you do eventually – I'm just sort of looking for what your sense of the color is around this idea of maybe prevailing incoming wage pressure.

.

Let me answer that question by adding some information you didn't actually ask about. But I've been asked this question by other investors, we're running at less than 4% unemployment right now and shouldn't that be a great thing for us? No, not necessarily. I'd actually prefer that we'd be running around 6% or 6.5%.

Then our base of field team members would be stable and we'd still have enough opportunities with businesses having difficulty in hiring people. To answer the second part of your question, do we have the ability to raise prices? Yes, absolutely. Not everywhere though.

So some of our business comes from national accounts and we've got contracts that dictate the terms. When those come up for renewal, we obviously try to sweeten the deal for us. And when we have to pay higher wages to employees for short-term work, we do build that into our margin expectations for what we charge our customers..

Great, thanks..

Absolutely, thanks for the questions..

As a reminder, we are now conducting a question-and-answer session. [Operator Instructions] There are no further questions at this time. And we have reached the end of the question-and-answer session. So I would like to turn the call back to management for closing remarks..

No closing remarks, so I just like to thank everyone for your interest and for dialing in. And we'll talk to you soon, or see you at the next quarterly call. Thanks very much. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..