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Text: I'm joined by our Chief Executive Officer, Patrick Beharelle.
We use non-GAAP measures when presenting our financial results.
Any comparisons made today are based on a comparison to the same period in the prior year, unless otherwise stated.
Total revenue for the third quarter was down 25% and we posted positive net income of $9 million or $0.25 per share.
We are very pleased that the company has returned to profitability.
We've taken the right actions to restore profitability and position the company for long-term growth as the economy recovers.
During the third quarter, we saw steady improvements in our revenue trends across most of the industries and geographies we serve.
Our cost management actions continue to show meaningful results which helps position us for stronger incremental profit margins when revenue growth returns.
Now, let's turn to our results by segment, starting with PeopleReady.
PeopleReady is our largest segment representing 61% of trailing 12-month revenue and 76% of segment profit.
PeopleReady is the 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 as well as our JobStack mobile app.
PeopleReady's revenue was down 29% during the quarter and we saw intra-quarter improvement with revenue down 27% in September versus down 32% in July.
PeopleManagement is our second largest segment representing 30% of trailing 12-month revenue and 15% of segment profit.
PeopleManagement provides onsite industrial staffing and commercial driving services in the North American industrial staffing market.
The essence of a typical PeopleManagement engagement is supplying an outsourced workforce that involves multi-year, multi-million-dollar onsite or driver relationships.
These types of client engagements tend to be more resilient in a downturn.
Revenue for PeopleManagement was down 8% during the quarter with the top line down just 2% in September versus down 12% in July.
Turning to our third segment, PeopleScout, represents 9% of trailing 12-month revenue and 9% of segment profit.
PeopleScout is a global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings.
Revenue was down 48% during the quarter versus down 53% in Q2.
PeopleScout results were particularly impacted by exposure to large travel and leisure clients.
Now I'd like to shift gears and update you on our key strategies by segment, starting with PeopleReady.
Our long-term strategy at PeopleReady is to digitize our business model to gain market share.
Most of our competitors in this segment are smaller mom and pops that don't have the scale or capital to deploy something like our JobStack mobile app.
So this, along with our nationwide footprint, is what makes us unique.
We began rolling out JobStack in 2017 to our associates and in 2018 we launched the client side of the app.
We now have digital fill rates north of 50% and more than 26,000 clients using the app.
In Q3 2020, we filled 726,000 shifts via JobStack representing a digital fill rate of 51%.
Our client user count ended the quarter at 26,100, up 37% versus Q3 2019.
In mid-2020, we introduced new digital onboarding features that cut application time in half.
This has led to some great operational results as we increase the ratio of associates put to work versus all applicants.
Early results indicate a 20% increase in worker throughput.
This is exciting because as we move back to a supply constrained environment, an increase in worker throughput will translate directly to revenue.
We believe we can further improve applicant throughput as we fine tune our processes.
Right now, we're also very focused on driving heavy client user growth.
A heavy user is a client who has 50 or more touches on JobStack per month whether it's entering an order, rating a worker or approving time.
JobStack heavy users have consistently posted better year-over-year growth rates compared to the rest of PeopleReady.
The growth differential is north of 20 percentage points and has held true even in this market downturn.
This makes sense, since we have many clients who use multiple vendors and we can grow our business simply by growing our wallet share even if our client's total volume is flat to down.
Our focus on heavy user growth is starting to pay-off.
We doubled our heavy user mix since 2019, up from 11% of our business in fiscal 2019 to 22% for 2020 year-to-date.
Our positive strategic progress is obviously overshadowed by the macro environment at the moment, but we continue to invest in our digital strategy and believe this approach will help PeopleReady emerge stronger than ever.
As our digital strategy continues to mature, we're taking a look at areas within PeopleReady where we can reduce our service delivery costs.
In 2020, we began testing a few different strategies.
It's too early to quantify potential savings, but we're developing a plan where cost savings will come from a mixture of both technology utilization and changing our go-to-market approach.
As we move down this path, I want to emphasize that the value and importance of our branch network should not be underestimated.
We need to maintain a local presence in the communities where we do business.
At the same time, we do see an opportunity to centralize more services and reorient job roles to improve our client-focused delivery.
We'll continue to update you on this front as plans evolve.
Turning to PeopleManagement, our strategy is to focus on execution and grow our client base.
Initiatives we've already implemented include sharpening our vertical market focus to target essential manufacturers and leverage our strength in e-commerce.
These are verticals that have held up well relative to the decline in non-essential goods at traditional bricks and mortar retailers.
We've also completed the integration of our Staff Management and SIMOS brand sales teams allowing the integrated team to offer a full portfolio of hourly and cost-per-unit solutions to clients.
These strategic initiatives are already paying off.
Even in the middle of this downturn, year-to-date new business wins at PeopleManagement are up 13% versus the prior year as we've secured $70 million of annualized new business wins versus $62 million the prior year.
Approximately half of new wins are in our Q3 run rate.
As the demand environment recovers, we'll be increasing sales resources and investing in client care programs to maintain our momentum.
Turning to PeopleScout, our strategy is to capture opportunities in an industry poised for growth.
Before COVID struck, we noticed a trend toward in-sourcing, with a handful of clients bringing more recruitment functions in-house.
Many of those in-house teams have been reduced or eliminated during the pandemic and we expect a trend reversal back toward outsourcing as the economy recovers.
Our strategy leverages our strong brand reputation as we are consistently ranked as a market leader by independent industry analysts and PeopleScout is traditionally the highest margin business within our portfolio.
Finally, I'd like to take a moment to touch on our balance sheet and capital allocation priorities.
We do have a solid balance sheet.
Our credit facility provides ample liquidity and we ended Q3 with more cash than debt.
Before the pandemic hit, we were generating substantial free cash flow and were focused on returning capital to shareholders.
Over the last five years, we've returned $169 million of capital to shareholders via share repurchases.
As we return to a more normalized environment, investing in our organic business opportunities will remain our top priority, but we'll also expect to renew our focus on returning excess capital to shareholders.
I'll now pass the call over to Derrek who will share greater detail around our financial results.
Total revenue for Q3 2020 was $475 million representing a decline of 25%.
We posted net income of $9 million or $0.25 per share and adjusted net income of $8 million or $0.24 per share.
While this quarter's bottom line results are lower than the prior year period, they are sizably better than the losses incurred in Q2 this year due to further improvement in our revenue and SG&A expense trends.
The Q3 year-over-year revenue decline was 14 percentage points better than the Q2 year-over-year revenue decline and the Q3 year-over-year SG&A decline was 8 points better than the Q2 year-over-year SG&A decline.
Adjusted EBITDA was $18 million, down from $39 million in Q3 2019, but up from a loss of $5 million in Q2 2020.
Gross margin of 23.3% was down 300 basis points.
Our staffing businesses contributed 230 basis points of compression with 180 basis points of pressure from negative bill and pay rate spreads and 50 basis points from mix and other items.
PeopleScout contributed another 70 basis points of compression primarily due to client mix and lower volume.
I'm going to spend a few moments stepping back from this quarter's gross margin results and share our perspective on the ebb and flow of gross margin across an economic cycle.
During a recession, the bill rates in our staffing businesses come under pressure as customers look to cut costs and as staffing companies compete in a lower demand environment.
However, pay rates do not come under the same amount of pressure which creates gross margin contraction.
In this particular recession, pay rate inflation has accelerated to entice contingent employees given COVID health concerns and due to the amount of federal unemployment benefits available, which for jobs on the lower-end of the pay scale when combined with state unemployment benefits, can provide more take-home pay than a work assignment.
In the recruitment process outsourcing business, gross margin also comes under pressure, but this has more to do with volume than price as RPO cost of sales is mostly comprised of recruiting personnel costs.
While we are able to reduce recruiting costs by reducing headcount, there is a semi-fixed component that creates negative operating leverage in the cost of sales for the RPO business as revenue declines, similar to the dynamic with the rest of our enterprise personnel costs that are reported in SG&A expense.
As the economy recovers, pricing power has historically swung back to the industrial staffing industry as demand for talent surges due to economic growth as well as a preference for more contingent labor due to the hesitation of businesses to hire permanent staff associated with uncertainty about the sustainability of the recovery.
Likewise, additional revenue volume has assisted the recovery of RPO gross margin.
We have an experienced team that has operated through these economic cycles and we have tested processes in place to help ensure we seize the opportunity to improve our gross margin in the future.
Turning to SG&A expense, we turned in another quarter of very strong results.
Expense was down $40 million or 31% compared to Q3 2019.
We also continue to challenge prior assumptions about the costs needed to run the business and invest in technology.
We are optimistic that these actions will result in a more efficient service delivery model.
The opportunity for additional cost savings is greatest in our PeopleReady business.
We see opportunity to further reduce the costs of our branch network while maintaining the strength of our geographic footprint through a greater use of technology, centralizing work activities, and repurposing job roles.
We've made good progress in 2020 by centralizing certain recruiting activities and repurposing certain job functions.
A necessary precursor to further reducing the costs of the branch network is a broader repurposing of jobs to increase centralization which can be accomplished through the normal course of employee attrition.
Client-facing job functions must also be repurposed to ensure we continue to meet the service expectations of our clients.
We will be testing these plans throughout 2021 before we make large-scale changes which will also help us provide more clarity on the savings opportunity.
Turning to our tax rate, our effective tax rate was 30% in Q3, which is higher than what we had experienced in prior years as a result of this quarter's performance reducing the net operating loss for the year.
This results in a reduction to our CARES Act carry-back benefit expectation resulting in some catch up expense this quarter.
Additional information on the components of our effective tax rate is available in our 10-Q filed today.
Turning to our segments, PeopleReady, our largest segment, saw a 29% decline in revenue and segment profit was down 39%.
We saw nice intra-quarter revenue improvement with September down 27% compared to 32% in July with further improvement to a decline of 19% in October.
The improvement was broad-based across most geographies and industries with construction, manufacturing, services, and transportation industries leading the way.
PeopleManagement saw an 8% decline in revenue and segment profit was up 35%.
PeopleManagement experienced encouraging intra-quarter revenue improvement with September down 2% compared to 12% in July.
Month-to-date for October, PeopleManagement was up 1%.
About half of the segment profit growth is attributable to cost management actions and half from unique costs in Q3 last year creating a favorable comparison this year.
Turning to PeopleScout, we saw a 48% decline in revenue and segment profit was down 97%.
Intra-quarter revenue did show improvement with September down 40% compared to 52% in July.
As Patrick noted, PeopleScout results were adversely impacted by exposure to travel and leisure clients, which made up roughly 25% of the prior year mix and revenue for this vertical was down 74% year-over-year.
Now let's turn to the balance sheet and cash flows.
Our balance sheet continues to shine, providing financial flexibility and stability.
Our credit facility provides ample liquidity and our debt position is at its lowest level since 2012.
We also repurchased 9% of our common stock at favorable prices earlier this year to boost shareholder return.
Year-to-date cash flow from operations was $99 million as compared to $53 million for Q3 year-to-date last year with the increase coming from the deleveraging of accounts receivable.
We've been on a nice trajectory of reducing our total-debt-to capital.
In 2017, our total debt-to-capital was 18%; in 2018, 12%; in 2019, 6%; and as of Q3 this year, nearly zero.
For the fourth quarter of 2020, we expect gross margin contraction of 250 basis points to 190 basis points.
This is less contraction in comparison with Q3 due to favorable mix and less recruiting staff in our PeopleScout business given the current revenue volume.
Our cost management strategies are on track.
For the fourth quarter of 2020, we expect a year-over-year SG&A reduction of $23 million to $27 million, which would result in $102 million to $106 million of savings in 2020.
All-in, this would produce a decrease in SG&A expense of about 20% in 2020.
I'd also like to remind everyone that our business can generate an incremental operating margin of about 20% on incremental revenue which can of course run much higher with gross margin expansion or further SG&A declines.
For capital expenditures, we expect about $7 million for the fourth quarter of 2020, which is net of approximately $4 million of build out costs for our Chicago headquarters that are to be reimbursed by our landlord.
Our outlook for fully diluted weighted average shares outstanding for the fourth quarter of 2020 is 34.8 million.
With respect to our tax rate, we are not able to provide an effective income tax rate outlook due to the variability associated with the relatively lower pre-tax income base and the semi-fixed nature of the Work Opportunity Tax Credit.
It's also worth noting that the Work Opportunity Tax Credit expires at the end of this year.
While this program has been in existence for decades and has always been renewed due to its appeal to both political parties, the timing can be lumpy.
Total benefits derived from this program were $11 million for fiscal 2019 and $6 million year-to-date in Q3 of this year.
While we have a lot more work to do to get back to where we were before COVID hit, we like the progress we have made.
We've taken the right actions to restore profitability and have done so without losing our operational strengths or technology momentum.
It has challenged us to think of new ways of running our business more efficiently.
Our balance sheet is strong.
Of most importance, the spirit of our employees is high.
This experience has created an even deeper sense of teamwork and camaraderie among all of us and we are excited about the opportunities in front of us.

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q3 adjusted earnings per share $0.24.
q3 earnings per share $0.25.
q3 revenue $475 million versus refinitiv ibes estimate of $454.4 million.

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