Compass Diversified Holdings (CODI) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Compass Diversified Holdings 2010 Second Quarter Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions).

At this time I would like to turn the conference over to Michael Cimini of the IGB Group for introductions and the reading the Safe Harbor Statement. Please go ahead, sir.

Thank you and welcome to Compass Diversified Holdings second quarter 2010 conference call. Representing the Company today are Joe Massoud, CEO, and Jim Bottiglieri, CFO.

Before we begin, I would like to point out that the Q2 press release, including the financial tables, is available on the Company's website at www.compassdiversifiedholdings.com. The Company also filed its Form 10-Q with the SEC earlier today.

Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or the Company. Now allow me to read the following Safe Harbor Statement.

During this conference call we may make certain forward-looking statements including statements with regards to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31st, 2009, as well as in other SEC filings. In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time I would like to turn the call over to Joe Massoud.

Thank you, Mike and Elizabeth. Good afternoon. Thank you all for your time and welcome to our second quarter 2010 earnings conference call. We are very pleased to report second results for the second quarter, results which frankly exceeded our expectations. For the quarter we generated cash flow of $14.8 million, a significant increase compared to the $7.8 million generated in the year earlier period.

We experienced revenue strength across the board and in a substantial way at a number of our businesses. We believe these topside results are reflective of our efforts during the recent economic downturn to utilize our financial strength and the leadership position that each of our niche businesses to increase the relative market shares.

As revenue trends have strengthened, we have also experienced considerable operating leverage at a number of our businesses leading to even more significant increases in cash flow. Our Q2 results were also positively impacted as compared to the prior period by our recent acquisitions of Circuit Express and to Advanced Circuits and Liberty Safe as a new platform company for us.

Before I turn the call over to Jim to give some specifics on the financials, let me now make some general comments on each of our subsidiaries. Advanced Circuits exceeded our expectations, as we continue to expand our leadership position in the quick turn and prototype PCV manufacturing niche, leaving the bookings and shippings levels, which were considerably higher than last year.

The second quarter also marked the first full quarterly contribution from the March add-on acquisitions of Circuits Express, which expanded our core quick turn manufacturing capabilities to include higher layer count boards frequently for aerospace related customers. The combination of the two businesses coming together as well as we'd hoped, both financially and strategically.

Next, American Furniture largely performed in line with our expectations during the second quarter. The furniture industry experienced an oval soft retail inventory, largely offset in AM's case by our increased penetration levels among several of our top customers and the addition of a number of new customers over the past year. In addition, we continue to see benefits from the Company's efforts to improve material sourcing and transportation cost management.

At Fox we saw a very strong performance in Q2, highlighted by the third consecutive quarter of double-digit revenue growth. As we maintain our focus on leveraging Fox's strong brand recognition in penetrating new verticals, we also continued to increase market share in our core premium mountain bike business. We are very pleased by the performance of Fox during the first half of the year and expect continued growth in this business as bookings for the remainder of 2010 are up significantly from 2009 levels.

In Halo the Company met our expectations in Q2 by reporting strong top-line growth. We continue to benefit from our strong rep recruiting efforts and remain focused on pursuing additional add on acquisitions, allowing us to take advantage of our scalable infrastructure. We also belief Halo operates in a late cycle industry so we anticipate continued growth at the top line, as the economy continues to stabilize.

At Liberty Safe, as expected at the time of the acquisition, revenues for the second quarter were below the level achieved for the comparable prior quarter. While this was partially due to an expected drop in overall demand for gun safes related to a less panicky macro environment and even bigger negative factor was a change in safe product line and marketing strategy at one major customer.

Importantly, we continue to be the primary supplier of safes to this customer, do not believe we've lost a relative share with them and expect these issues to be resolved by the end of the year. However, we do expect sales through the remainder of 2010 to be lower than 2009 for this customer and for the Company as a whole.

Most importantly, we do not see any issues that negatively impact our medium or long-term outlook at Liberty and, despite this current quarter of sales shortfall, we remain very excited by the strong growth prospects at our newest platform company. Liberty is the niche industry leader with a strong history of stable cash flows. We will continue to work closely with management in order to capitalize on the increase in demand among shooting sports enthusiasts, as well as the rising awareness and demand for premium home safes over the multi-year trend.

Moving to Staffmark, this business increased its revenue by 48% in Q2 compared to last year, as we continue to take advantage of a strong temporary market recovery combined with gains in market share by Staffmark. The resulting increase in revenues further magnified in terms of cash flow production as a result of the Company's significant operating leverage.

As we've said before, while the staffing industry represents an early cycle business, we expect to benefit over the long-term from the macro environment movement among employers to increase the share of contract labor as a percentage of total labor force and the opportunity to use the recent downturn as a tool to restructure and optimize their work forces towards that goal.

Finally, at Tridien Medical, formerly Anodyne, we reported Q2 results well ahead of our expectations. Our subsidiary management team has performed exceptionally well in controlling costs while demand for our core products remains strong.

Based on our Board's long-term outlook on CODI's cash flow generation capacity, as well as their view of the appropriate mix of cash to be paid to our owners versus reinvest in our business, we paid a cash distribution of $0.34 per share for the second quarter. This distribution increases the cumulative distributions paid to shareholders to more than $5.31 per share since our IPO in May 2006.

Going forward, we expect to continue to achieve year-over-year growth in cash flow for the remainder of the year, even before taking into account the effect of potential future acquisitions of new businesses. Speaking of which, with approximately $200 million in available liquidity, we continue to pursue accretive platform and add-on acquisitions.

Our strong balance sheet provides a distinct competitive advantage in this environment. As you've all heard us discuss in the past, we take a thoughtful and prudent approach to acquisitions, focusing on Company reason to exist, management and valuation. We will continue to do so and believe that this approach will yield further attractive business additions for our owners.

With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri to add his comments and our financial results.

Thank you, Joe. Today I will discuss our financial results for the quarter and six months ended June 30th, 2010 including a review of the operating results of each of our seven subsidiaries.

On a consolidated basis revenue for the quarter ended June 30th, 2010 increased by more than 40% to $404.3 million from $287.5 million for the prior year period. The net loss for the quarter ended June 30th, 2010 was $0.7 million as compared to a net loss of $0.2 million for the quarter ended June 30th, 2009. This is primarily due to the recording of a non-cash supplemental put expense of $2.6 million for the current quarter, as compared to an accrual reversal of $0.3 million for the comparable prior year quarter.

Now, turning to our subsidiary results beginning with Advanced Circuits, for the quarter ended June 30th, 2010 Advanced Circuits revenue increased approximately 80% to $19.4 million compared to $10.8 million in the prior year period. This increase is attributable to the strong demand in each of our product offerings and from approximately a $5.2 million in net sales from the March 2010 acquisition of Circuit Express.

Income from operations for the quarter climbed approximately 42% to $6.3 million compared to $4.4 million for the same period in 2009. This increase is primarily due to the operating profit generated from the increase in sales. For the six months period ended June 30th 2010 Advanced Circuits revenue increased approximately 49% to $33.9 million compared to $22.8 million for the prior period of 2009, of which $6.2 million of the increase was due to sales and the acquisition of Circuit Express.

Income from operations was $7.2 million compared to $8 million for the prior year period in 2009, primarily due to a combination of the reversal of $1.2 million loan forgiveness accruals done in 2009 and from the recording of $3.8 million of non-cash stock compensation expense recorded in 2010. We are pleased with Advanced Circuits' performance during the second quarter as demand for our quick turn in prototype production services continues to be strong.

With the successful integration of our add-on acquisition of Circuit Express, we remain well positioned to achieve strong top-line growth.

Now, I'd like to turn it to American Furniture Manufacturing, or AFM. For the quarter ended June 30th, 2010 AFM's revenues were $33.3 million versus $0.8 million -- which was $0.8 million lower than the $34.1 million of revenues in the prior year quarter. Operating income for the quarter was $1.2 million compared to $2 million for the second quarter of 2009. This decrease in operating income was mainly attributable to the recognition of $0.5 million of business interruption insurance proceeds from the second quarter of 2009, as compared to none in the second quarter of 2010, and for the lower operating profit resulting from the lower level of sales achieved in the second quarter of 2010.

For the six months ended June 30th, 2010 revenue increased slightly to $77.3 million compared to $75.6 million in the year ago period. Operating income decreased to $3.9 million from $4.2 million for the six months ended June 30th, 2009, which included $1.2 million of business interruption insurance.

We believe AFM continues to outperform its peers during a challenging retail environment. Going forward, we remain focused on further expanding customer penetration levels and strengthening our leading presence in the promotional furniture niche.

On the cost side we have increased the source of raw materials from abroad and utilized more third-party carriers within our transportation department in order to enhance operating efficiencies while maintaining our commitment to provide high quality products with short lead times.

Turning to Fox Racing Shox, revenue rose approximately 16% to $34.7 million for the quarter ended June 30th, 2010 compared to $29.9 million in the prior year period. This increase was largely attributable to higher sales in our powered vehicle sector, which includes our partnership with [Polaris and Ford]. Income from operations was $3 million during the second quarter compared to income of $2 million for the quarter ended June30th, 2009, due largely to the operating profit generated from the increased sales.

The six months ended June 30th, 2010 revenue climbed approximately 35% to $67.4 million compared to $50 million in the prior year period due to increased sales in our mountain bike sector as well as in the power vehicle sector. Income from operations for the first half of 2010 increased to $5.9 million compared to $1.2 million for the prior year period. For the third consecutive quarter, Fox posted a double-digit revenue growth. As we continue to penetrate new verticals and capitalize on strong demand among market enthusiasts, we expect to achieve strong profitable growth over the long term.

Moving on to Halo branded solutions, for the quarter ended June 30th, 2010 the Company's revenues increased approximately 20% to $35.3 million compared to $29.5 million for the same period last year due to higher from existing customers and from $1.2 million in sales attributable to acquisitions made since June 30th, 2009.

Income from operations for the three-month period ended June 30th, 2010 was $0.2 million compared to a net loss of $0.1 million in the second quarter of 2009. For the six months ended June 30th, 2010 Halo's revenues were $65.0 million compared to $56.2 million for the same period last year, an increase of approximately 16%. The loss from operations narrowed to $0.5 million versus a loss of $2.1 million for the prior year period. We are pleased by Halo's performance during the second quarter and first half of 2010, which reflects more favorably over our economic conditions compared to last year. As a reminder though, based on the seasonality of this business, Halo typically generates the majority of its annual EBITDA during the third and fourth quarters.

Turning now to our newest company, Liberty Safe, which we acquired on March 31st, 2010, for the quarter ended June 30th, 2010 revenue was $13.6 million compared to $17.6 million in the prior year period, which was prepared on a pro forma basis as if we acquired Liberty Safe on January 1st, 2009. As Joe mentioned, this decrease was mainly attributable to lower sales to a major customer. The Company reported an operating loss of $0.2 million for the second quarter of 2010 as compared to operating income of $1.9 million in the same period last year, due to the lower level of sales achieved in 2010.

For the six months ended June 30th, 2010 Liberty reported revenue of $29.5 million on a pro forma basis compared to $35.6 million in the prior year pro forma period. Pro forma income from operations for the second quarter was $1.4 million compared to $2.4 million for the prior year period ended June 30th, 2009. We remain very excited about Liberty's attractive growth potential. The Company's leading market position combined with its positive macro trends bodes well for its future performance.

Moving on to Staffmark, for the quarter ended June 30th, 2010 revenue increased approximately 48% to $251.4 million compared to $169.4 million for the same period of last year due to increasing demand for temporary staffing services. The Company's income from operations was $6.2 million for the second quarter of 2010 as compared to a loss of $1.5 million for the previous year period.

For the six months ended June 30th, 2010 revenue was $468.8 million compared to $332.4 million, an increase of approximately 41%. Income from operations was $5.4 million as compared to a loss from operations of $59.9 million in the year earlier period, which included the non-cash impairment expense of $50 million as well as for $2.8 million to integrate and integration expenses weighted to the 2000 acquisition of Staffmark by CPS personnel.

Staffmark continues to benefit from a strong market recovery, particularly in the light industrial segment. As we maintain our focus on growing top to top line, our cost containment efforts have led to a dramatic improvement in profitability.

Now onto Tridien Medical, formerly known as Anodyne Medical Device, for the quarter ended June 30th, 2010 revenue increased approximately 20% to $16.8 million compared to $14.0 million for the same period of last year as a result of higher sales from the Company's non-powered product offerings income from operations for the second quarter doubled to $3.4 million compared to $1.7 million for the same period in 2009 due to the higher sales and lower manufacturing overhead.

For the six months ended June 30th, 2010 revenue increased approximately 25% to $32.1 million compared to $25.6 million for the same period of last year. Income from operations increased to $5.6 million compared to $2.9 million from the same period in 2009. Tridien's strong performance for the second quarter and first half of 2010 reflect ongoing demand for the Company's core product offerings as well as for its improved cost structure.

Looking ahead, we continue to roll out a corporate rebranding campaign aimed at taking full advantage of our position as the number one provider of medical support services.

Turning now to the balance sheet, we had $15.1 million in cash and cash equivalents and had networking capital of $151.0 million as of June 30th, 2010. We also had $75 million outstanding under our term debt facility and $13.2 million outstanding under our $340 million revolving credit facility as of June 30th, 2010 with no material maturities since the (inaudible).

As a reminder, we completed a public offering in April 2010 of 6.575 million trust shares representing a primary offering of 5.25 million trust shares by CODI and a secondary offering of 1.325 million trust shares by a selling shareholder. CODI raised approximately $75 million of net proceeds from its portion of the offering that were primarily used to repay $70 million of outstanding borrowings under our revolving credit facility. CODI did not receive any proceeds from the secondary offering.

We incurred approximately $1.2 million of maintenance capital expenditures during the second quarter of 2010 and remain on track to incur maintenance capital expenses of approximately $8 million for the year.

I will now turn the call back over to Joe.

Thank you, Jim. Overall, we're very pleased by the strong performance across our family of businesses in the second quarter and through the first half of 2010. We feel that each of our companies is very well positioned within its industry and that this will allow us to grow our cash flow through the remainder of this year and beyond on behalf of our shareholders. We are also optimistic that our balance sheet strength will allow us to accretively make further acquisitions on behalf of our owners.

With that said, I would like to thank everyone again for joining us in today's call. We'd be happy to take any questions you may have. Operator, Elizabeth, please open the phone lines?

(Operator Instructions). Our first question today comes from Larry Solow with CJS Securities.

Joe, maybe -- I know you talk to a lot of companies and anything you could share either with your companies and their results or just, as you've talked to a bunch of people on the street just anecdotally, sort of what trends you see year-to-date? And I know there's a lot of caution, certainly in the media and along what you were just hearing out there, your customers.'

Yes that's tricky. That's really tricky. I mean I think it almost -- it varies by company leading to a somewhat cloudy picture. I mean I think we've seen retail softness, which is consistent from what we heard in the industry on the furniture side. I think Liberty Safe beyond the issue that we've got with one customer in particular has some retail softness. On the other hand, Staffmark, knock on wood here, is going gangbusters and continues to do very well.

Fox Racing Shox, who has an end product consumer or an end user that's a consumer obviously, continues to be very strong, although some of that strength is due to the growth in the powered vehicle side and so some of that's just absolute market share gains. So I would say it's a varied picture and it's led us to kind of have the stance that even in the companies where we're doing pretty well to look hard at our backlog and our orders and understand it and to be cautiously optimistic but for a number of these companies, someplace like Fox, you have enough backlog going in that we can feel pretty good about the rest of the year.

But I think that the Staffmark we feel good about because we believe the macro, have always believed the macro, think that the combination of kind of regulatory uncertainty around healthcare, uncertainty in the economy and just this long-term desire to restructure your work force is going to be a good thing for the staffing industry kind of independent. But it's cloudy. I mean the best that I can say to you is we look at the sometimes the variance among the companies and then try to understand it ourselves and the best we can come up with is we know we've gained market share. That's good.

What it means for the overall economy it's a little unclear. We feel like there's got to -- we don't feel like there's double dip and, Elias, Alan or Jim, if you disagree jump in. And we think there's going to be a moderation of growth to a slow number. I think the latest thing I heard this morning is people are talking I guess about a 2.5% number for the rest of the year in terms of growth. That seems reasonable and consistent with kind of the many different pieces of the puzzle we've seen but, Larry, I can't give you a whole lot of clarity.

No understood, understood and then in terms of Staffmark itself, and I guess obviously a better economy would be better for them, the better the view but even so in this kind of environment where the sort of the employers are worried about sort of the head fake or whatnot, wouldn't that maybe drive them more towards temporary staffing?

Yes we kind of think that you'll continue to see employment numbers in the temporary sector that outpace. We think the temporary sector of it when you look at the BLS numbers will continue to be the strongest or one of the strongest areas and that should be good for all the staffing companies and we also think Staffmark did a nice job of laying some seeds in the last year. And we've seen some real growth in some companies where we historically hadn't been major providers, so we would expect that whatever the industry does we should do a little better.

So that's a company we're pretty confident about. I don't want to say not independent of the economy because if we went into a double dip obviously people are going to be letting people go again and that would not be good for the staffing industry but, absent a real sort of reversion into the whole, we feel pretty good about that.

And there's a July -- from the jobs report number that saw the 10.7 was flat, the U.S. jobs, does that--?

Yes we saw that. I don't really -- we haven't -- Elias might have more a sense on the color or the number but I saw that. I can just tell you that our July was pretty good. We outpaced. We appear to have outpaced the industry materially.

Okay and sequentially.

And we didn't see a slowdown in July.

Sequentially I know Staffmark, well of course Q4 is usually the strongest but is Q3 usually sort of in line with Q2 on a historical basis?

It's usually a little better. It continues to build. Elias, do you want to comment on that?

Yes no I mean, Joe, you're 100% right. Q3 seasonally will be better than Q2 and Q4 is kind of on par typically maybe a little bit better than Q3 but we generally expect to see decent increases in Q3 and a lot that is back to school shopping, which is about to happen now, so there's a lot demand that gets placed for that and then the initial stocking for the holiday season so we would expect seasonal increases starting in Q3.

Okay then I'm just going to ask two more specific subsidiary questions. On Landmark does the -- I guess you were anticipating some year-over-year downturn. Does the fact that these stricter gun laws won or didn't materialize, is that sort of a one-time inventory realignment or could that sort of impact things going into--?

Yes on Liberty it's pretty interesting actually because if we piece apart our number and we look at kind of everyone but one major customer, the number is right in line with it's kind of a mid single-digits decline year-over-year, which is what we'd expect. The last year there were a lot of people worried not only about gun laws but the general economic uncertainty when people start hoarding cash and worrying about the failure of the bank system that all seem to have driven some sort of increased safe sales and the decline among everyone but one particular customer is right in line with what we expected and maybe even a little better.

The other decline is unique to a situation we have with a customer, which we hope to work through. Specifically to your issue of gun laws, between the Chicago law have proposed is part of it, kind of safe storage. We've seen the trend towards gun laws to be things like people who are "right to arm" advocates or right to hunt, right to whatever you want to call them, defending their right by sort of countering with a safe storage laws and that seems like it's sort of a movement in a handful of states. So that would be good for us right if you were to get those kinds of responses.

Most of the laws on the books specifically that are gun control legislation are hand gun laws and so most of our customers are actually long gun users. There haven't been to my knowledge and, Alan, chip in if you know, but I don't think there have been any proposed laws sort of in the last couple years regarding hunting guns, which is really our core customer. Most of them have been directed at either handguns or what they would call tactical weapons, which is a nice way of saying something that's maybe more automatic and a little more high powered.

Got you. Okay and then just last question was on Anodyne or I guess you call it Tridien Medical now and that looks like probably the outside of Staffmark the other real nice surprise in the quarter and clearly you're getting some better overhead absorption. Are these sort of low 30s gross margins? Is that sustainable number or -- you had a nice 300 bip sequential.

Yes, Elias, do you want to comment on the margins at Tridien?

Yes we think it's sustainable and business was relatively strong, as you indicated. There was some increased overhead absorption and so, barring any type of major change in kind of what a revenue levels are, we would think that this level of gross margin in a sustainable level.

Okay great, excellent. Thanks for taking my questions and we will see you in a couple weeks at our conference.

Thanks, Larry, we're looking forward to it.

Vernon Plack, BB&T Capital Markets.

Were there any non-recurring items in the quarter, Joe, that are noteworthy?

Jim.

There was a non-cash--

Supplemental put right?

Yes it was a non-cash supplemental put out as well as an evaluation of a call option that was recorded. Both of those reflected on the cash flow statements.

Okay and, Jim, I wasn't sure if I caught the impact that Circuit Express had I think for six months it was $6.2 million. What was it for the quarter?

$5.2 million, $5.2 million for the quarter and $6.2 million for the year-to-date. We acquired Circuit Express in mid-March.

Great and, Joe, now that you're basically covering the dividend with cash available for distribution, any thoughts, your thoughts, on the dividends?

Yes my thoughts are that it's a -- I expect the Board to continue to pay it out. We are not going to revisit in this calendar year -- well we revisit it every quarter. I would be surprised if the Board decided to increase the distribution in this calendar year, which isn't to say that I think they're going to increase at the beginning of next calendar year. I just can only look out so many quarters and I think it's our -- it's never been our view to want to pay out 90% of cash flow -- or in the first place or anything like that, so we think it's time to kind of build the cushion back up.

I mean we had enough of a piggy bank that I think we not only withstood the downturn, we believe we could withstand a couple more years of that downturn but thank god that didn't happen. But I think we're going to fill the piggy bank back up a little bit before we think about it. And with the opportunities that we're seeing, it's kind of hard to justify increasing the distribution because we believe that our owners would want us to redeploy that excess cash into some of those things we're seeing so that's my view.

Again, it's up to the Board. We have a vigorous discussion of it every quarter but my view is that there's no immediate increase as a result of the fact that we're well over the distribution at this point. It clearly is going to increase at some point in the future. It's our desire to have an increase in distribution. I think we would like to see what '011 looks like and how the beginning -- how the end of this year, into the beginning of this next year kind of is shaping up.

That's great. Thank you.

Greg Mason, Stifel Nicolaus.

Joe, could you give us a little more color on the Liberty Safe and the issues with the customer and kind of how long do you think it will take for that to be resolved?

Yes so we had a customer that had sort of two issues. One is that they wanted to reduce their inventory, which we knew about from I'll just use rough numbers. These actually aren't the numbers but if they were carrying 50 a store they wanted to be carrying 15 a store, which was going to work for us because we have the capability to supply on fairly quick turnaround so that's one of our advantages, so we knew that there was going to be this kind of one-time inventory crunch down. The thing that's exacerbated that is a decision by the store, a joint decision by the store and us, whatever, a decision that was made to change some of the SKU models and redesign the product a little bit that has -- appears to not have been successful and that we're aggressively addressing with the company.

The good news is I mean it's impacted the company. They want to get their sales back to where they were before or higher. We feel like there's been no loss in confidence in Liberty as a provider. We continue to be the exclusive or near exclusive provider and we think it's going to get resolved but the truth is the sort of redesigning planograms and SKU layouts and everything it's a multi-month process so our view is that you may not kind of come back to where we were till 2011.

The one-time movement through the inventory, that kind of snake or that elephant moving through the snake, should be done by the end of the third quarter or beginning of the fourth quarter so if you sort of tease apart the two influences, one of those will begin to resolve itself by the end of this year but perhaps the more important one because it's longer term with is probably going to resolve itself kind of over the course of the year. But we're pretty confident.

I mean, this is a customer that we spent a lot of time with in diligence. We know at very high levels, both as Compass and as Liberty and so we're pretty -- we're concerned obviously but we're pretty confident we know what the issues are.

And can you talk about seasonality in that business? Is that heavily weighted towards 4Q with holiday sales?

Yes, Alan, what's your comment on seasonality here?

Sure I mean it's -- there's certainly a seasonal aspect to this business but I would compare it more to pretty much like an American Furniture where I think the first and fourth quarters are a bit stronger than the second and third quarters. It's not -- it's certainly not wildly seasonal and I think that, given the thing that adversely impacted performance in the second quarter, we certainly would expect future quarters to be better. But at the same time, yes I think that if you think about the fourth quarter and the first quarters as slightly better than the other quarters, that's probably the best way to think about this business.

Okay great and then moving on to Staffmark, could you talk about your cost containment and how that will flow through as that market continues to rebound? What do you think is permanent and what do you think is temporary?

Yes so I don't know that we've every given you kind of specific dollar numbers around that but our view is that the cost containment measures had kind of a couple components. One was corporate and overhead and the downturn happened to coincide pretty well with the merger with CBS and Staffmark so the costs that we took out there that we believe were low double-digit millions kinds of costs, those ought to stick for the most part.

The other costs we took out are sort of some technology productivity gains but then a lot of branch costs and so so far we haven't added back a lot of the branch side costs and we've been running our footprint more effectively. We didn't leave markets. That was one of the things I think we foresightedly didn't do, which is in markets where we didn't have as dense a presence as we do in others, we didn't pack up any of those markets, so we might have cut down some branches but we stayed operating in them and so it's not -- there's no kind of need to proliferate the branches back into markets where we once were where we aren't now.

So I would say that if we got back to the same revenue levels where we were before in a pro forma basis, Elias, I would say $10 million to $15 million of those cost cuts should stick fairly reasonably. What's your thought on that?

Yes I would agree with that, Joe, and I think in general there has been--

The margin question too so maybe you want add about that too.

Yes there's been a very strong effort on cost containment. Clearly gross margin came down in the last three down cycles and so we needed to be more productive in order to offset that. I think if you look at the Q2 numbers we really got a lot of operating leverage that came back. There's still some more operating leverage that we expect to drive in the system although that being said I think productivity gains on actual people in the branch we've probably realized the majority of that productivity gains and at this point it's more of your traditional overhead leverage.

We haven't used up all of the capacity of the infrastructure so you get leverage on lease expense and kind of the utilities and things like that. we'll get overhead, leverage on our corporate overhead, so I think as you look out here we will certainly expect to get more incremental EBITDA on every dollar of revenue that's driven, although it won't be nearly as strong as what we've experienced over the last three quarters as we've kind of really driven a lot of human field productivity out of the system.

Great and then one final question, Joe, could you talk about new acquisitions, both new platform acquisitions as well as add-on acquisitions in the pipeline?

Yes so we're working hard and the pipeline, which you know is a phrase we don't love to use, but the pipeline as it were is reasonably full and I measure that more by how many people are traveling and how many sort of advance meetings we have with management teams. I would expect us to in the next quarter or two to be able to add at least one new platform, given the activity and maybe better than that but, again, we're not going to press -- I don't know how many times I can say this so it's probably not needed to be said but we're not going to press and we've certainly walked away from things near the end when we didn't feel comfortable and didn't think it was right for our owners. But right now we feel pretty good about the pipeline and think that we'll be able to grow the business.

And then on the add-on side we're always looking. We have a couple businesses in particular that are reasonably active at a Halo and Advanced Circuits. I think they're always looking for things to put together accretively and we're optimistic something like that could happen.

Thank you, guys.

(Operator Instructions). Robert Dodd, Morgan Keegan.

Just on Staffmark, on the competitive environment have you seen any rationalization in terms of other operators out in the market and maybe withdrawing from some of your--?

Yes there's one company in particular that I think we ran into from time to time, which is Select Staffing, which I think has been -- there have been some transactions. I know that they were going to be acquired by [Spack] and then that didn't go through and we are seeing a little less of them.

But the market is so -- it's so local. It's like you have to a national player and yet you fight the battles locally and so it would really be more of a market-by-market kind of description who are we seeing in North Texas or who are we seeing in Cincinnati or who are we seeing in Columbus? Clearly there's been a rationalization over the last 24 months of people you've never heard of, which some of the smaller companies who really lost so much business that they couldn't stay that it didn't make sense for them to stay in business. That rationalization has occurred.

In terms of the big players, I don't think there's anything material, maybe with the one exception of the company that I noted. But I think there's a lot of business out there for everyone out there and I think that one of the things that our management team did really well was to sell through the downturn. We didn't -- we were not cutting costs on sales people in the downturn like some of these companies and I think our willingness to add accounts that had five or ten means that these accounts now have 30 or 40 or a couple hundred and so that's what I think happened more than necessarily major players going out of business/

Got it. Another one on probably Jim's worst nightmare, taxes, if the key to -- if we take out the Staffmark adjustment in Q2 if I try and back it out it still looks like the taxes are running at a little higher pace as of late than they used to. Have you changed your kind of policy on parent sub loans or anything like that or is there any color you can give us on--?

No we haven't but I would suspect so these loans get paid off right, so then there's less interest down below and there's some amortization that wears off. I mean is there anything specific, Jim?

No not really, Joe. I mean, you do have to adjust for the Staffmark because Staffmark had a funny quarter but once you pull that out I think they're pretty -- fairly consistent.

Okay great thanks.

Ladies and gentlemen, that does conclude today's question and answer session. I would not like to turn the call back over to Mr. Massoud for any additional or closing comments.

Thanks, Elizabeth. I just wanted to thank everyone for their time and we're pretty excited about our second at results and we feel good about what the rest of the year is going to look like but in this environment you kind of always have to keep your guard up, which we're doing. So thanks for your time and we'll look forward to talking to you again next quarter.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.