TrueBlue : Q4 Prepared Remarks

TrueBlue Q4 2019 Financial Results

Conference Call, February 5, 2020

PREPARED REMARKS

INTRODUCTION

Derrek Gafford, Executive Vice President and Chief Financial Officer, TrueBlue:

Good afternoon everyone and thank you for joining today's call. I'm here with our Chief Executive Officer, Patrick Beharelle.

Before we begin, I want to remind everyone that today's call and slide presentation contain 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 website 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.

STRATEGY AND SUMMARY RESULTS

Patrick Beharelle, Chief Executive Officer and Director, TrueBlue:

Thank you, Derrek, and welcome everyone to today's call. Before I dive into quarterly results, I wanted to take a moment to reflect back on 2019. This past year had its share of challenges evidenced by a 5% revenue decline and 4% net income decline. Some of the revenue decline was expected and came from a smaller number of large clients that simply experienced issues within their own businesses. As the year unfolded, we saw a broader softening in revenue trends, similar to other industrial staffing providers, as clients pulled back in response to lower volumes. While overall job data was positive for the United States, the contingent portion, which makes up 2% of the workforce, experienced a pullback as businesses used contingent services more sparingly in light of rising economic uncertainty. While we cannot control the macro environment, we will continue to focus on what we can control, which includes balancing smart cost management with strategic investments.

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I am pleased with the success of our cost management efforts in 2019. In total, our selling, general and administrative expenses came down by more than $25 million, or roughly 5%, compared to the prior year. In the third quarter we announced a set of cost actions that are expected to result in approximately $8 million of net annualized savings during 2020. At the same time, we've been making targeted investments in sales and marketing to drive long-term growth. One example is PeopleReady's new client experience team. This is a dedicated team of professionals focused on client care and retention by proactively reaching out in the critical early days to understand their satisfaction and help clients move up the curve in terms of JobStack usage. While the program is still relatively new, the feedback from our branch-based colleagues and our clients has been overwhelmingly positive. The team is also helping to proactively drive more activity through our strategic cross-selling program. Our cross-selling efforts generated nearly $50 million in sales for 2019, boosting growth for the company by approximately 2%. These investments combined with the strategic focus of our team give me confidence that we are on the right path and will maintain our industry leadership into 2020 and beyond.

Our industry is ripe for digital transformation and we believe we are on the leading edge to digitally differentiate our services and capture increased market share. Staffing and recruiting have always been people-first businesses and the accelerated adoption of digital strategies in our businesses has come with the realization that technology can actually help build stronger human connections. Our PeopleReady segment has an app called JobStack that has filled more than six million shifts digitally since its inception and is currently filling a job every nine seconds. After we on-board our workers, they can proactively book jobs through a mobile app anytime, anywhere versus having to go to a branch early in the morning or wait for a call or text. On the flip side, clients can post job assignments 24/7. As we begin to leverage the power of digital technology, it is transforming the way we do business. Approximately 25% of our JobStack orders are now placed outside of traditional branch hours and 21,300 clients use JobStack, up more than 50% from just one year ago. Throughout 2019, we've seen disproportionately high-revenue growth from clients that are heavy users of JobStack, and we believe there is potential to capture even more wallet share as we focus on removing process friction. The staffing industry is highly fragmented across a wide variety of mom and pop and regional businesses. I believe our JobStack strategy provides us with the opportunity to clearly differentiate our PeopleReady services to capture more market share. On the recruiting side of our business, PeopleScout's Affinix improves outcomes for recruiters and candidates by making applying for a full-time job simpler and more convenient. Moreover, clients that are fully implemented on Affinix are experiencing improved time to fill, candidate flow and candidate satisfaction. This reduced friction for candidates and for clients, in our view, is the future of the industry.

Our mission at TrueBlue is to connect people and work and we are proud of it, having connected 724,000 people with work in 2019. Approximately half of these workers were connected to temporary jobs through either our PeopleReady or PeopleManagement industrial staffing segments. The remaining half were connected to full-time jobs via our PeopleScout segment. Each worker who comes to TrueBlue has their own unique story, whether it is a truck driver who is between jobs and needs to pick-up another paycheck to pay the rent, or a recent college grad who is happy to land their first full-time position with a Fortune 500 company. Here at TrueBlue we have been connecting people with work for more than 30 years and we're

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very good at it. As the world of work continues to evolve, we continue to find new and exciting ways to leverage our expertise and our new strategic Uber Works relationship is a great example of this. While Uber Works has a great platform, one area they do not have experience is in paying and managing W2 employees. So, Uber Works turned to TrueBlue for help, and we've created a new business venture called PeopleWorks, to serve as an employer and payroll service provider for workers booking jobs on the Uber Works app. While it's early days for the PeopleWorks venture, we are excited about its potential.

Now, let's discuss our Q4 results. Total revenue for the fourth quarter was down 9%. Clients were conservative in the use of our services during the quarter in light of softness in their own business volumes and continued economic uncertainty, particularly in industries associated with physical goods. While this created a challenging environment, I'm pleased with our strong cost management results and I'm encouraged by recent improvements in the demand for PeopleReady services. Now let's take a closer look at the performance of each of our three businesses.

PeopleReady is the leading provider of on-demand labor and skilled trades in the North American industrial staffing market and this business represented 62% of total company revenue and segment profit in fiscal 2019. PeopleReady's revenue was down 9% during the quarter due to lower business activity across our client base. This decline was slightly worse than our expectation, though we did see the trend improve to - 7% in December, after adjusting for the Thanksgiving holiday shift.

Turning to our next segment, PeopleManagement provides on-site workforce solutions in the North American industrial staffing market that offer compelling value and are a perfect fit for larger clients with longer-duration strategic needs for contingent workers. This business represented 27% of total company revenue and 10% of segment profit in fiscal 2019. Revenue was down 7% in Q4 v. down 12% in Q3. The improvement is due to the run-off of previously disclosed revenue headwinds.

Turning to our last segment, PeopleScout is the global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings and represented 11% of total company revenue and 29% of segment profit in fiscal 2019. Revenue was down 18% during the quarter, primarily due to previously disclosed headwinds, namely one client that was lost after being acquired and less volume and lower margins on another large client. We also saw some softness in our PeopleScout UK business, as political and economic uncertainty weighed on client order volumes.

As we close the books on 2019, I'm pleased with the strategic progress we've made and excited about the path ahead. Our balance sheet is in excellent shape, and we are very pleased that we were able to leverage excess free cash flow to return approximately $39 million of capital to shareholders via share repurchases in 2019, marking the third consecutive year that annual share repurchases exceeded $30 million. When I look at TrueBlue's digital strategy and competitive position, I am pleased by what we have accomplished. We have more clients and workers using our technology than ever before. As we move into a new year and decade, I believe our digital strategies provide further opportunity to differentiate our services, capture additional market share and deliver industry-leading growth.

I'll now pass the call over to Derrek who will share greater detail around our financial results.

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Q4 2019 RESULTS AND Q1 2020 OUTLOOK

Derrek Gafford, Executive Vice President and Chief Financial Officer, TrueBlue:

Thank you, Patrick. Total revenue of $591 million was near the low end of our $587 to $612 million outlook. Total revenue was down 9%, which was larger than the decline in Q3 of 6%. Approximately one percentage point of this step down was due to the roll-off of project work that positively impacted Q3, but did not continue in Q4, and the remainder due to softening demand trends.

Lower than expected revenue was offset by efforts to deliver lower than expected SG&A expense resulting in earnings per share results that were in line with our expectation. Net income per diluted share of 23 cents was in line with our 18 to 28 cent outlook, as was adjusted net income per diluted share of 39 cents in comparison to our outlook of 35 to 45 cents. EPS was down 38% and adjusted EPS was down 36% primarily as a result of previously disclosed headwinds which contributed about 25 percentage points to the EPS decline.

The effective income tax rate for the quarter of 7% was below our 14% expected rate primarily due to additional tax credits.

Gross margin of 25.4% was down 110 basis points from lower gross margin in our PeopleScout business and our staffing business. Half of the consolidated gross margin drop was due to previously disclosed headwinds at PeopleScout, and the remainder in our staffing business associated with a prior year payroll tax benefit, and additional costs associated with a shorter holiday peak season.

Our disciplined approach to managing costs showed in our results this quarter. SG&A expense was down $11 million, $1 million of which was due to lower adjusted EBITDA exclusions, and the remainder from lower costs in the core business. SG&A was down 8% and SG&A as a percentage of revenue was up 30 basis points.

Throughout 2019, we discussed some isolated client revenue and segment profit headwinds within our PeopleScout and PeopleManagement businesses. Q4 was the first quarter without any of these headwinds impacting our PeopleManagment business. The only headwinds impacting Q4 were within our PeopleScout business associated with one client lost after being acquired and lower volume and margin on another large account. The first client will cease being a headwind after Q1 2020. The second client will cease being a headwind after Q3 2020. For Q4 2019, these items suppressed total company revenue by $8 million and adjusted EBITDA by $4 million. Please see our earnings release deck for more information regarding these headwinds.

Adjusted EBITDA of $21.0 million was down 36% due to lower revenue and gross margin which also contributed to a drop in Adjusted EBITDA margin of 150 basis points.

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During the quarter we repurchased $8 million dollars of common stock bringing our full year repurchases to $39 million, which represents 59% of free cash flow. This leaves $119 million of total repurchase authorization.

Turning to our segments, PeopleReady revenue was down 9%, which was lower than the mid-point of our expected decline of 7%, and a step down from the 4% decline in Q3. Contributing to the declining trend was two points of benefit from project work with one of our clients in Q3 that did not continue in Q4, and the remaining step down was due to softening demand trends in the core business concentrated in the construction and manufacturing industries. However, after adjusting for the Thanksgiving holiday shift, we were encouraged to see the revenue trend improve in December to a decline of 7% with continuing improvement into January. Segment profit for Q4 was down 19% due to the decline in revenue, and the timing of a prior year payroll tax matter that benefited Q4 last year but had a neutral impact for the year as a whole.

PeopleManagement revenue was down 7% which was consistent with our expectation. While we have yet to return PeopleManagement to growth, we are pleased to be lapping the previously disclosed headwinds and see the revenue trend improve from a decline of 12% in Q3. We are also encouraged about the prospect for future revenue growth with new business wins up 21% in 2019. Segment profit was down 45% primarily due to the revenue decline and additional recruiting costs associated with a shorter peak holiday season in 2019.

PeopleScout revenue was down 18%, which was lower than our expected decline of -16% to -8%. The lower than expected results occurred in our UK business due to uncertainty surrounding the Brexit vote. Segment profit was down 54% which is primarily associated with the previously discussed headwinds and the incremental revenue weakness in the UK.

Turning to cash flow for the company, year-to-date cash flow from operations totaled $95 million and capital expenditures were $28 million, netting to free cash flow of $67 million.

The overall strength of the balance sheet continues to improve. Total debt of $37 million is down from $80 million at the end of 2018, and our debt-to-capital ratio is 6% compared to 12% a year earlier. On a trailing 12-month basis, our total debt-to-adjusted EBITDA multiple stands at 0.3.

Turning to our outlook for the first quarter of 2020, we expect a revenue range of -9% to -4%. The midpoint of the range is an incremental improvement from Q4 and consistent with current trends. We expect a net loss per basic share range of 7 to 0 cents, or an adjusted net income per diluted share range of 4 to 11 cents. These figures assume a basic share count of 37.8 million and a diluted share count of 38.4 million. The adjusted net income per diluted share outlook we provided translates into an Adjusted EBITDA decline of roughly 50%. It's important to note that Q1 is our lowest revenue volume quarter of the year. Consequently, the decline in revenue has a more pronounced impact on year-over-year profitability trends in Q1, due to the smaller dollar base of all profitability measures in Q1 relative to other quarters. Also contributing to the drop in profitability is $3M of Adjusted EBITDA headwind from the two clients I mentioned earlier. In regard to our effective income tax rate, we were pleased that the Work Opportunity Tax Credit was extended

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for another year. We expect an effective income tax rate of about 12% in Q1 and for fiscal 2020, which is lower than our previous rate of 14%.

While economic uncertainty exists, we are staying committed to our digital strategies. We believe we are leading the industry in moving to a more digitally-oriented business model to differentiate our services, and acquire market share. We plan to invest in customer acquisition and retention initiatives to not only acquire more business, but to ensure we come out strong when the economic climate improves. We also plan to stay diligent in managing our operating costs. And lastly, we are committed to returning capital to shareholders through stock repurchases.

This concludes our prepared remarks, please open the call now for questions.

TrueBlue Q4 2019Financial Results Conference Call, Feb. 5, 2020,Prepared Remarks

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