Stacey A. Burke - Vice President of Corporate Communications Steven C. Cooper - Chief Executive Officer, President and Director Derrek L. Gafford - Chief Financial Officer and Executive Vice President.

Kevin D. McVeigh - Macquarie Research Randle G. Reece - Avondale Partners, LLC, Research Division Sou Chien - BMO Capital Markets Canada Brian T. Davis - BofA Merrill Lynch, Research Division Paul Ginocchio - Deutsche Bank AG, Research Division Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division.

Good day, ladies and gentlemen, and welcome to the Q3 2014 TrueBlue Earnings Conference Call. My name is Mark, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Stacey Burke. Please proceed..

Thank you, and welcome. We appreciate everyone joining us for our call today. Please note that on this conference call, management will reiterate forward-looking statements contained in today's press release and may make or refer to additional forward-looking statements relating to the company's financial results and operations in the future.

Although we believe the expectations reflected in these statements are reasonable, actual results may be materially different from the forward-looking statements set forth in today's press release and presentation slides, which were filed in an 8-K today.

Examples of factors which could cause results to differ materially can also be found in our most recent filings with the Securities Exchange Commission. The discussion today also contains certain non-GAAP financial measures.

Information relating to comparable GAAP financial measures may be found in the press release and presentation slides, which are posted on our website at www.trueblue.com. We encourage you to review that information in conjunction with today's discussion. On this call today is TrueBlue's CEO and President, Steve Cooper; and CFO, Derrek Gafford.

I'll now turn the call over to TrueBlue's CEO, Steve Cooper..

Thank you, Stacey. Good morning, everyone. Today, we reported 2014 third quarter revenue grew 40% to $633 million, which produced $42 million of adjusted EBITDA and $0.54 of adjusted net income per share. We are pleased with the success of our growth strategies, which produced record revenue and profit growth this quarter.

On the first day of the quarter, we completed the acquisition of Seaton and have had a very successful first 90 days together. The acquisition included the industry-leading brands of PeopleScout, HRX and Staff Management.

The operations and results in the third quarter for these new brands performed as expected, and we remain excited about the future growth opportunities we now have in the recruitment process outsourcing business, along with our ability to serve large accounts with on-premise services.

The RPO business is a fast-growing segment of the human capital space. PeopleScout and HRX are positioned well on this space with award-winning service delivery. Staff Management is serving some of the largest and fastest-growing companies in the United States.

We are proud of the quality each of these brands deliver and excited about how they will shape TrueBlue as we continue to grow and develop our service capabilities.

For our legacy business, we have continued to make progress in building a more efficient business model through the use of technology and combining certain leadership and sales teams across our industrial staffing business lines. This has allowed us to close 52 branches year-to-date while maintaining the revenue in those combined markets.

Cost savings related to those 52 closings will continue to show up in our leverage as we continue to grow revenue with a more stable base of cost. For the most part, we have retained the employees in the closed branches while we transition the customer and worker base.

We expect to see expanding EBITDA margins through 2015 as a result of these closings. Our third quarter organic growth was impacted by our energy business sector. Throughout 2014, we've had delays in project startups and have continued to project the revenue into the next quarter.

We continue to serve the energy sector very well as we've had close to $20 million in revenue in the third quarter. That compares to our peak of approximately $30 million per quarter at the end of 2012. We feel comfortable at this point with between $15 million to $20 million per quarter going forward in our energy sector.

Although this has created a drag this quarter in organic growth, we do not estimate that will continue after Q1 of 2015. Our organic growth, excluding energy, was 5%, right at our expectation. It's been a busy quarter for us, and with the bulk of Seaton integration behind us, the fourth quarter remains just as exciting.

Bringing the leadership teams together quickly from the newly acquired businesses with our existing leadership team has jump-started the process of offering a broader range of solutions to all of our customers.

In addition to the temporary staffing services we've traditionally provided, we can now do more for customers through sourcing, screening and on-boarding their on-premise temporary employees and permanent employees. We remain enthused with the organic growth opportunities in our business. We are in the right service lines that are showing demand.

With our focus on a broader spectrum of capabilities for our customers, we have the opportunity to even improve our growth rates from here. From general labor to skilled construction to workforce management and recruiting full-time positions, we find ourselves well positioned in sectors that are growing.

We're also encouraged that our EBITDA margins can continue to expand from here. Our goal is to surpass 6% EBITDA margins, and even continue to grow beyond that is within reach. Let me turn the call over to Derrek for further analysis and commentary.

Derrek?.

14 points of consolidated growth from the Seaton acquisition, which will hit its anniversary as we start the third quarter. Revenue from this point is considered organic. The remaining 8 points of consolidated revenue growth is comprised of 6 points from legacy TrueBlue and 2 points from Seaton.

The 2 points of consolidated organic contribution from Seaton is based on a 10% growth rate assumption in the second half of 2015 in comparison with the second half of 2014. Consolidated adjusted EBITDA for 2015 is expected to be about $150 million, representing growth of over 25%.

This produces an adjusted EBITDA margin of 5.6% versus the 2014 margin of 5.2% on a pro forma basis, which assumes we owned Seaton for all of 2014.

On a reported basis, which only includes our period of ownership, adjusted EBITDA will be 5.4% or 20 basis points higher than pro forma as our reported results during 2014 included Seaton's peak revenue and EBITDA quarters.

A variety of additional information on our strategies, financial position, performance and details on the expectations shared today can be found in our press release, earnings release deck and roadshow presentation located on our website. That's it for our prepared comments. We can now open the call for questions..

[Operator Instructions] Your first question comes from the line of Kevin McVeigh from Macquarie..

I wonder if you could give us a sense what drove kind of the falloff in the green energy.

Was that a function of where oil has been? Or is that something that's been a little bit longer term in the making here?.

Yes, that's -- it's kind of gradually come at us this year with our clients in that space of -- the types of projects, the location of projects that's been under shift over the last 12 months. So there's definitely a different makeup of projects in -- here at the end of '14, headed into '15 than we had in 2012.

2012 was very California-oriented, and the projects are shifting a bit, headed towards the Southeast, and they're a little bit smaller projects. So yes, there's definitely been a shift, Kevin, in the types of projects we're serving..

And then is Boeing, Steve, is that even a factor at this point? Or how are we thinking about Boeing going forward?.

Yes, it's a great client for us still, but it's not -- we're not forecasting it to return to its peak levels. It's very stable at this point in time, and therefore, it's like any other customer. Large still, but it's not so large that we have to talk about it and tell you the shifts in revenue..

Okay. And then just kind of switching to the '15 guidance, it seems like the revenue relative to consensus was pretty much spot on, but there's a pretty significant delta on the EPS.

Can you help us understand, is that just a different tax rate? Or where is kind of the delta on where we are relative to the earnings, relative to consensus?.

Yes, the consensus that's out there compared with ours, I think the consensus is a little bit higher, maybe $3 million or $4 million of EBITDA, kind of start there. It's a tough one to reconcile because some folks are using adjusted EBITDA, some are not. That could contribute to it as well.

I think the tax rate out there is closer to 38% on a blended average of consensus versus what we're showing here at 40%.

And I think where there's a little bit of difference in the D&A line, which is somewhat to be expected when we do an acquisition of this size, while we gave the annual outlook for that, it's still tough to get into the consensus a bit. And hopefully, the guidance that's given today helps with all that..

Your next question comes from the line of Randy Reece from Avondale Partners..

Derrek, could you give us an idea where intangible amortization is running right now and how much that is in the D&A in your guidance?.

Yes, let me do a couple of things here, Randy. I want to make sure everybody's straight on the amortization with the Seaton acquisition. So right now, where we are, I'm going to give it to you on a quarterly basis for Q3 of this quarter. Depreciation -- D&A overall was $9.7 million.

That was broken down by, let's call it, $6.2 million of depreciation and $3.5 million of amortization. So if you annualize those numbers, that takes you to about $39 million. Our 2015 forecast has $40 million in it.

And I think it's important, as we talk about this subject, to talk about the incremental that has come on here from Seaton and the components of it because there's one part I want to bring to everybody's attention and make sure they're clear on. The annual depreciation and amortization from Seaton going forward will be about $17 million.

So I'm talking $17 million on a 4-quarter annual basis. $8 million of that's traditional amortization of intangibles. There's $5 million of traditional depreciation, so normal CapEx and depreciation related to that. There's something in between here that I'm going to call amortization-like depreciation.

So there's $4 million here that's going to be in depreciation, but it's more like traditional amortization. And what this is, it's the increase in the market value of Seaton's IT systems and products. So when we do an acquisition, we got to bring everything to fair market value.

This is $4 million of annual depreciation going forward that will drop off in the future. So there you have it. You have $17 million going forward..

All right, very good. And the adjustment -- you reduced fourth quarter revenue guidance for Seaton by about $5 million.

Could you discuss the performance of the pieces of Seaton versus your expectations in the third quarter and the change in your outlook?.

Well, to be clear, where we are with Seaton right now is -- if we take a look at our results in the third quarter and the guidance we gave today for the fourth quarter, that will bring us to about $400 million of revenue during the back half of 2014 from Seaton and EBITDA in the range of $22 million compared to what we talked about last quarter was a range of EBITDA during that same time period for Seaton of $21 million to $23 million.

So I think we're -- compared to the last time we talked, we're hitting pretty much right in the middle of that. As far as the performance of Seaton, the business there -- all components of that business are growing quite nicely right now. I don't know there's a special call-out on any of the segment's operating performance..

Your next question comes from the line of Jeff Silber from BMO..

This is Henry Chien calling in for Jeff. I had a question on the outsourcing Seaton business. Looking at the guidance for fourth quarter, it looks like it was taken down from your prior guidance in terms of EBITDA.

Could you just comment on what's going on there?.

Yes. I think that's kind of what we just talked about here. If we take a look at what our guidance was in the third quarter for Seaton, we hit that pretty much right on the mark.

For the fourth quarter, if you add that guidance that we gave for the fourth quarter and what we did in Q3, that's going to put us at EBITDA of about $22 million, really right in the range of what we last talked about..

Got it, got it. Understood. And in terms of the slowdown for the energy sector, is it -- I know you mentioned there were some delays in projects.

Is there anything else that we should be thinking about or anything that might extrapolate into the future?.

Well, that business has changed a bit. Rather than be a handful of large projects, California-oriented, it's several small projects spread out through the South, mostly the Southeast, a little bit still in California, but the shift and makeup of those is changing. The California-based projects had higher bill rates.

They were more prevailing-wage projects. We've had a shift of the type of labor we're putting on these projects and not as much high-skilled, it's more general labor. And so the dynamics have shifted a bit, but the numbers we've given here today reflect what our future optimism is for that business, that it's going to stay strong.

It's just not going to be where it was at its peak at the end of 2012, starting 2013..

[Operator Instructions] Your next question comes from the line of Brian Davis from Bank of America..

We've talked in the past about the construction market, excluding, obviously, energy projects.

Can you talk more about trends you're seeing there and what you expect moving forward?.

Yes, the organic trends across -- I'm just going to talk -- this is about legacy TrueBlue right now. The trends across most of the industries we serve was really right around that mid-single-digit organic growth rate. Call it 5 points was about where our -- that's where our blended average was.

We just didn't have really many call-outs here in differences in industries compared to that blended average. Now with construction, it's right in there. We'd like to see that higher. That's a point of focus for us.

So we're not yet satisfied with that growth rate in construction right now, but it's not very different from the overall average we're seeing in other industries..

Your next question comes from the line of Paul Ginocchio from Deutsche Bank..

Could you talk about the incremental margins you're expecting into 2015 from both Seaton and your core business, the TrueBlue business, incremental EBITDA margins there?.

Sure thing. Thanks for the question here. Yes, so if we take a look at -- what I'm going to do is I'm going to talk about gross profit conversion rates, if you don't mind, because the margins are a bit different between the 2 businesses, but the bottom line is roughly the same.

So for the legacy TrueBlue business, we've got a very strong incremental gross profit conversion rate in that. If you run the numbers, as you get to spend some more time with it, it's about 60%, so that's a very strong conversion rate for us.

The Seaton business, while you don't have a full annual look at this, is approximately the same conversion rate, so both of these business convert gross profit at a strong rate..

So that 60% you're talking about for 2015, how does that compare to your expectations for 2014?.

For Seaton?.

For both..

Well, on the legacy TrueBlue business, it's a bit less than that. And it's been a little bit noisy because of acquisitions, so we got to strip the acquisitions and such out of there.

But to put it to apples-to-apples terms on the legacy business, that's what we've talked about before, a gross profit conversion rate of 60% is an incremental EBITDA margin of about 15 points for TrueBlue. We're a bit south of that, particularly with the recent acquisitions and the slowdown in the revenue growth.

We need strong, at least mid-single-digit, organic revenue trends to hit that conversion rate..

And on Seaton, is it looking -- is that 60% gross margin conversion rate in 2015, is that better or worse than what you think you're going to do in '14?.

That's a little bit better..

So if I heard you right, it's -- legacy TrueBlue is a little worse and legacy -- or Seaton is little bit better..

Going forward, they're at about the same. If we were to talk about 2014, both are a little bit under that conversion rate.

And I'm comparing for -- you have to understand I'm comparing Seaton, what we're -- how our performance is in 2014 to the numbers that they were using for 2013, when the business was sold, so those were maybe a little bit more optimistic. If we adjust it for that, I suppose that the conversion rates would be closer to the 60%.

The fundamentals of both of these businesses are very well intact, both at Seaton and what they're their doing. That business model is right where we expect it to be. And with TrueBlue, the same thing, other than the organic revenue trends not at the level that we would expect..

Maybe I can sneak one more in. You're closing a lot of branches. I would have thought your incremental conversion rate of gross margin would actually go up into '15 with the branch closures, but that doesn't seem to be the case.

What am I missing?.

Well, it's in there at about 60%, so it's still very healthy. The branch closings have added a bit to our conversion rate here, but this is still early-on guidance here. We're at the third quarter and putting an annual number out there.

We're not giving a lot of detailed assumptions here, but I think if you run the numbers, it's closer to 65% conversion rate for legacy TrueBlue. That would be at an all-time high for us..

[Operator Instructions] Your next question comes from the line of Mark Marcon from Baird..

I was -- just on Boeing, just to make sure I have that right, you're basically looking at this $20 million annualized run rate.

Is that correct in terms of what you saw during the third quarter and what you're projecting for the fourth quarter?.

That's correct..

Okay. And then can you just give the quarterly detail with regards to these green energy projects? Because that seems to be the primary source of the delta in terms of the organic growth rate relative to the expectations. So I was wondering if you could dissect that if possible, by quarter..

So let me give you -- I'll give you Q3 of 2014 and Q3 of 2013. Energy was about $17 million for Q3 2014 and about $28 million for Q3 of 2013..

Was that $28 million fairly consistent with what you ended up seeing across the quarters in 2013?.

Yes, that was pretty consistent. It stepped up a bit in Q4 of 2013 to -- probably another $5 million from that. In my prepared comments, what I've given you all is that the headwind here from the energy business is going to run about $10 million to $15 million a quarter going forward.

Let's call it $15 million in Q4 of 2014, maybe $10 million-ish as we get into the first quarter of 2015, and as we get to Q2 of 2015, that will largely be gone. Now that's assuming roughly a $20 million revenue run rate and no pickup in that as we move into next year..

So you're assuming that by Q2, it gets to the $20 million and so, therefore, would be -- is there any chance that you think that maybe, just given the change in natural energy prices or traditional energy prices, that perhaps, some of those projects may end up getting delayed a little bit further?.

Well, I think there's some good opportunities here on the horizon. As Steve mentioned, one of the things that's happening right now is we have some larger West Coast projects that are coming to conclusion, and the Western part of the U.S. has been a big part of the energy growth here. Going forward, there'll be a larger number of projects but smaller.

Mostly, that pickup is coming in in Southeastern states, some of that because of some potential decommissioning of some coal plants. And we see some pretty good opportunity here in the Gulf region, outside of this, but more focused some of the natural gas conversion plants that are being constructed.

So I think that's a high-level overview of some of the opportunities on the horizon..

Okay.

And then with regards to the impact of the branch closures, can you talk a little bit about that just in terms of how you're thinking that that's impacting, in any way shape or form, the organic growth rates that your currently seeing x the energy impact?.

Yes. So I would say that the impact from closing branches is running a little under 1% impact in our growth rate. That's going to round up to 1 point, so let's call it 1 point. However, that has been there -- that impact was there in the second quarter and largely to the first quarter.

So overall, it's impacting the organic growth rate by, let's call it, 1 point. As far as the trajectory of the organic growth rate, where it is now compared to year-over-year comparisons the last couple quarters, that's not a factor..

Okay, great.

And then can you talk a little bit about the progress in terms of the mobility initiatives and how that's ramping?.

Yes. So from a mobility perspective and our text messaging, that is widely dispersed amongst our operations. It's being used quite heavily. We are doing some more updates to that as we enter 2015 to get some more automated algorithmic matching going on in our customer base and our worker base. So from a mobility perspective, we're excited about that.

We've also enhanced some of our recruiting efforts, particularly a variety of application and recruiting practices here on the TrueBlue side, mostly in the Labor Ready brand right now, which, I think, is going to drive some nice efficiency for us as well as increase our candidate pool, keeping us more relevant for those folks that want to apply online versus coming in to our branch.

Going into 2015, we'll look at some opportunities to start expanding that to some of our other service lines. A little too early to talk about it more than that, though..

Okay, great.

And then just for the Seaton guidance that you've put out there, what are the primary areas of growth that you would expect in 2015 relative to '14? Is it more skewed towards RPO? Or is it more skewed towards other areas?.

Yes, it's a little bit more elevated on the RPO side. However, we're -- really, what's in there is about a 10% growth rate next year on a prior-period basis comparison. So RPO services, a little bit higher than that 10%, the OWM, a little bit south of that, but pretty consistent growth across each of those service lines..

I would now like to turn the call over to Steve Cooper for closing remarks. Please proceed, sir..

Thank you. We appreciate everybody joining us early this morning and your interest in our organization. We'll update you as we move forward. Have a good day..

Thank you very much. That concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day..