TrueBlue Inc (TBI) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to Labor Ready fourth quarter earnings announcement conference call.

Today's call is being recorded.

Today we will discuss Labor Ready's fourth quarter earnings, which were announced this morning. If you have not received a copy of this announcement, please contact Tracy Woods at 1-800-610-8920, extension 8206, and a copy will be faxed to you.

Now for opening remarks, I would like to turn the call over to Ms. Stacey Burke. Please go ahead.

Here with you today from Labor Ready is Joe Sambataro, Chief Executive Officer, Steve Cooper, Chief Financial Officer, and Matt Rodgers, Chief Operating Officer. They will be discussing Labor Ready's 2002 fourth quarter earnings results, which were announced after market close yesterday.

Before I hand you over to Joe, I ask for your attention as I read the following Safe Harbor. Please note in this morning's conference call management will reiterate forward-looking statements contained in the press release and may make additional forward-looking statements relating to the company's financial results and operations in the future. Although we believe that the expectations reflected in these statements are reasonable, actual results may be materially different. Additional information concerning factors which could cause results to differ materially is contained in the company's filings with the Securities and Exchange Commission, including the report on Form 10-Q filed November 12, 2002.

I'll now turn the call over to Joe Sambataro.

Thank you, Stacy. Good morning. Today we announced that revenue for the fourth quarter ended December 31st, 2002 was 222.6 million, with net income of 3.3 million or 8 cents per share. We raised our fourth quarter earnings estimate to 5 cents to 7 cents compared to our original guidance of 4 cents to 7 cents based on modestly improving sales trends and confidence in our ability to continue to control costs. I am pleased to report that we exceeded our stronger expectations.

The economic environment of 2002 was challenging, which is why the 46 percent increase in income from operations is significant. With the current cost structure, a 3.9 percent sales increase in the fourth quarter over the prior year's quarter resulted in a 100 percent increase in net income. While I would not suggest we can maintain that relationship going forward, we do believe that for every 5 percent increase in sales, we can achieve a 20 percent increase in net income. This relationship demonstrates the operational leverage that drives our profits. The fact that incremental improvement in top-line revenue can produce significant improvement to the bottom line. Steve will provide more details on Labor Ready's financial results later on in the call.

The strong results that closed out the year reflect a sales efforts and cost controls we have put into place in the fourth quarter of 2001. Last year, the Labor Ready team reduced operating costs by 33 million. We increased employee productivity and continued to increase the effectiveness of our customer acquisition programs. I applaud the team's discipline and drive. Our performance is a result of their efforts this quarter as well as throughout the past year. These results also testify to the benefits that Labor Ready provides our customers in every phase of the economic cycle, providing them with the flexibility to run their businesses more efficiently in a downturn and grow more rapidly as business expands.

Last year, Labor Ready served over 270,000 customers, well established and up and coming companies trying to sustain and grow their business turn to Labor Ready to free them up from administrative details and eliminate screening and advertising costs. Matt will go into greater detail about emerging initiatives we are putting into place to serve markets and expand market share.

As we serve businesses around the country and internationally, we put nearly 600,000 people to work last year, helping many to bridge permanent employment through our vast network of offices and customers. Labor Ready's national brand is an asset on both sides of the temporary labor equation, employers and employees.

Looking ahead, we will continue to focus on those practice that is served us well last year, improving sales, controlling cost, and an unwavering commitment to our workers, customers and employees. We will stay true to our mission. We put people to work.

Our strategy for 2003 is to continue to focus on branch revenues and profitability so as to capture the full benefits of our operating leverage. We plan to achieve this by increasing our focus on customer service as a key competitive advantage. Expanding our market share is the only true day labor provider on a national scale. Continuing to refine branch manager training and compensation so as to create total alignment with corporate goals, and continuing strong cost discipline that serves us well during 2002. We also plan to expand operations in the US, Canada and the UK. We see the UK as a very promising and relatively underserved market for us. We plan to open an additional 15 offices in the UK, and 25 new offices in smaller markets in the US and Canada. Matt will be discussing an exciting new branch cost structure for smaller markets that allows these offices to break even in less than one year.

All these elements bode well for Labor Ready's ability to deliver strong growth and profitability in the coming years.

The final element of this picture is an economic recovery. And while we have seen positive trends for the past several quarters, we recognize there are still significant uncertainties in the marketplace. However, when the economy recovers, we are poised to rebound higher and stronger than ever. Before I hand the call over to Matt Rodgers, I would like to congratulate him on his recent promotion to chief operating officer. Our operations have benefited greatly from Matt's leadership. The executive team is the strongest in the history of the company, and Matt is a key member of this group.

I will pass the call on to Matt, who will describe three exciting prongs we have -- projects we have been working on.

Thank you, Joe. Good morning, everyone. Let me start today by assuring you in no uncertain terms that we are a sharply focused as ever on continuing to drive the three main components of operational success, those being steady sales growth improvements, greater levels of customer satisfaction, and disciplined cost controls. I will also take this opportunity to share with you today several of the key initiatives that we have been working very hard to accomplish as a team over the past year.

The first initiative revolves around the program that we have used to compensate branch managers for several years. The current compensation program pays branch managers a bonus based on their ability to create and collect revenue with only a slight emphasis on gross margin achievement, and no overall profit and loss accountability.

Further, because of the dynamics of the current bonus structure, only a fraction of the branch managers system wide ever qualify for a bonus under the current program. We recognized the need to develop a program that incented not only outstanding sales performance but solid bottom line performance as well, while becoming much more inclusive in the process. Last year, we began holding broad focus groups and feedback sessions surrounding the issue of branch manager bonus pay. We solicited feedback from compensation experts. We listened carefully to our people and learned a great deal about what we were doing right and how we could improve in this area.

The outcome is a new branch manager incentive structure that holds each branch manager accountable for the entire performance of his or her business unit. The new incentive program is inclusive. It allows every branch manager the ability to create a bonus by their efforts each month. It works very well inside the constraints of fiscal prudence, while incenting the right behaviors of the right people every day.

The new incentive program has been successfully tested in the field over the past six months, and is now in place in approximately one-third of our offices across the United States. Our goal is to have complete implementation across the US by July 1 July 1st of this year. The new branch manager incentive plan will, without a doubt, help us to consistently drive sales and earnings growth while improving the level of service that we provide to our customers. When combined with our ongoing commitment to communication, training and mentoring, this new incentive plan will have a positive effect on branch manager tenure, which has a direct correlation to customer satisfaction.

The second initiative is equally exciting. Over the past 18 months, we have experimented with several prototypes of our business model with one goal in mind. That goal was to create a business unit that could profitably penetrate the approximately 125 third-tier markets in the United States and Canada that we have yet to enter. Over the past year, we have experimented with subtle branch variations and ideas in markets across the United States and Canada. From that group of experiments, we have created a program that has now been proven to achieve our goal. We have chosen to refer the modified model as Labor Ready express. The term "express" applies only to the tertiary market that is being served and the branch configuration implemented. We will appear to our customers and our workers as labor-ready.

It is our goal to broaden our presence in tertiary markets with the express model. While these markets may produce smaller sales volumes, they can be very profitable opportunities for us and will help us achieve sales and earnings growth in the quarters ahead. In 2003, the United States and Canada will open approximately 25 express locations, and as Joe said, we have set our UK branch opening target at 15 branches.

The next key initiative relates to our hands-on sales efforts. We have just finished a system-wide sales competition driven by new account acquisition. These contests are very effective in giving our operations team the focus, structure, and accountability necessary to drive our sales results regardless of the seasonality curve or economic cycle. We have a system-wide sales contest scheduled for each quarter this year, and the operations team is ready to make as many sales calls as necessary to win not only at the contest level but also in the new branch manager incentive plan. The intensity of execution and focus on sales generation remains as strong as ever. We are not standing by waiting for economic growth. We are creating it. Effective sales efforts combined with ongoing attention to customer service and disciplined cost controls, have allowed us to grow not only our top line but also our bottom line in the fourth quarter.

I am pleased with the results we have achieved in the fourth quarter, and proud of this company's performance throughout the year 2002. I look forward to continuing improvements in sales growth, customer satisfaction and profitability.

As this time, I'd like to turn the call over to Steve Cooper.

Thank you, Matt. First off, I'd like to also offer my congratulations to Matt on his appointment to chief operating officer. It's really exciting to see the progress we're making as a company, and Matt's leadership has had a big impact on that progress.

This morning I'll be reviewing with you some of the financial highlights for the quarter, including the great leverage that we demonstrated in our operations and the strength in our financial position that was clearly established during 2002. The 3.9 percent increase in revenue in the fourth quarter was driven by some of the following factors.

First and most exciting, we generated same-store revenue growth of 3.4 percent. Second, we operated close to the same number of locations we did a year earlier. Over the first three quarters, we had operated 8 percent fewer locations, and in the fourth quarter, our operating units were only down 1 percent. Third, we had one additional billing day in the quarter due to the timing of our cut-off periods. This extra day resulted in about 1 percent of our growth.

As a result of this same-store sales revenue growth and the facts that we operated a consistent number of branches as compared to a year earlier, average branch revenue increased 4 percent for the second quarter in a row. This is one of the many benchmarks that we consistently measure. Growth in average branch revenue provides the operating leverage that Joe just mentioned that will continue to drive our profitability.

Now for some discussion about our outlook for the first quarter and 2003. We are currently seeing some uncertainty in the marketplace. We aren't overly concerned at this point as we have broader trends in our company and the staffing industry as a whole that gives us encouragement about the future of the industry and the recovery is that is starting to take hold.

However, the speed of that recovery is precisely where the uncertainty lies. Our revenue guidance for the first quarter has taken into consideration our most current trends, adjusted for what we can see for the remaining portion of the first quarter. With that, we estimate revenue in the range of $170 million to $175 million for the first quarter.

For 2003 as a whole, it is difficult to make assumptions about economic circumstances beyond our current quarter. However, with what visibility we have today in our current situation, we are estimating revenue in the range of 900 to $920 million. Gross profit margins in the fourth quarter were 29.3 percent. This was a sequential 60 basis point improvement over the first and second quarter margins and a 20 basis point improvement over the third quarter. We anticipate further improvement in our gross margins during 2003 to 29.5 percent.

Selling, general and administration costs were 25.8 percent for the quarter, an improvement of 190 basis points as compare today a year earlier. Total SG&A costs for the quarter were $57 million, as compared to 59 million a year earlier. Year-to-date, these costs were $220 million, as compared to 253 million a year ago. As Joe mentioned earlier, that is a year over year annual reduction of over $33 million in operating costs as compared to a year earlier. And a $48 million reduction in annual costs as compared to two years ago.

At the end of the fourth quarter, we had 2700 employees as compared to 2900 a year earlier. Trailing 12 months revenue employee increased from 321,000 a year ago. Bad debt expense was 1.2 percent of revenue for both the quarter and the year as a whole. As compared to 1.7 percent a year earlier. This is a $6 million improvement in bad debt expense over 2001. We expect SG&A as a percent of revenue during 2003 to be about 25.8 percent of revenue. The 30 basis point increase over 2002 is related to the opening of the 40 new branches, along with the impact of the new branch manager bonus program which were both discussed today. The strong increase in net income for the quarter was attributable to the increasing gross profit of $1.6 million, while we reduced operating costs $2 million. The net result was an improvement to pretax income of 90 percent as compared to the fourth quarter a year ago.

Our tax rate for the quarter was 28 percent, bringing the effected annual rate for 2002 to 35 percent. The improvement in our annual tax rate from 38 percent a year ago is a result of $1.1 million of tax credits we've earned related to worker opportunity, welfare to work, and empowerment zone tax credits. The empowerment zone tax credits of $500,000 were new to us this quarter, therefore bringing the tax rate down significantly for the quarter to adjust to our expected annual rate. These credits are not only significant to our financial performance, they really are a compliment to the service we are providing to communities across America by putting people to work.

Based on the continuation of $1 million of these credits, we expect our 2003 annual tax rate to be approximately 35 percent, at the levels of income we've projected. We estimate the net loss per share for the first quarter of 2003 will be 8 to 10 cents, and net income per share for 2003 to be 30 cents to 35 cents. We have significantly improved our financial position during 2002. We have $85 million of cash and marketable securities as of the end of 2002, along with $6 million of long-term marketable securities. This $91 million of cash and cash equivalents is a $42 million increase as compared to the end of 2001. We also have an additional $62 million of restricted cash as compared to a year earlier. The total of all cash and cash equivalents increased $104 million during 2002, primarily from the following activities - cash provided by operating activities was $42 million for the year, and net cash provided by issuing convertible notes was 67 million. The increase from these two activities of $109 million of cash was offset by cash payments on long-term debt and capital expenditures combined of $5 million.

This net increase of $104 million in our cash positions has strengthened our financial position significantly during 2002. It has provided the necessary collateral for our worker's compensation program to remain strong and self-sufficient, which reduces the risk of our programs changing during these uncertain times in the insurance industry. The increase in our cash positions also gives us the ability to expand our operations as the economic conditions continue to improve. We've appreciated the opportunity to update you on or our progress and provide an outlook for 2003.

At this time, we'll open up the call for any questions you may have.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please signal us by pressing the star key followed by the digit 1 on your touch-tone telephone at this time. For those of you joining us on a speakerphone, please make sure that your mute function is turned off to ensure that your signal may properly reach our equipment.

And we'll take just a moment to assemble our roster.

We'll take our first question today from Adam Waldo with Lehman Brothers.

Good morning, Joe, Matt and Steve. How are you?

Good morning, Adam.

A few questions, if I could, on the quarter and then also on your outlook. On the quarter, could you just give us a little more color, Steve, as to why the tax rate accrued was about 28 percent? I guess implicitly, what you're saying is you were overaccrued for the first third quarters of the year, then accrued to about the 35 percent rate for all of '02 and are now giving guidance for the same in '03. Is that about right?

Yeah, that's exactly on point. When we finished the third quarter, we were unaware of the $500,000 (ph) of additional empowerment zone credits that came to us in the fourth quarter. So we adjust that in the fourth quarter, so our annual rate is 35 percent. And we're fairly confident with those rates, those tax credits repeating at about the $1 million level for 03.

OK. And none of that is contingent on the renewal of welfare to work legislation in 03, Steve? In other words, all that is fully funded under existing Welfare To Work in

Right. Those are programs we know about today and obviously if something got repealed, we would change our outlook.

OK. And then shifting to the gross margin per for performance in the quarter, a bit stronger than we were looking for, I wonder if you could give us a little more specificity as to the drivers of gross margin. Give us a sense for average bill and pay rates for the quarter and inflation rates and maybe give us a sense for where you accrued worker's comp expense as a percentage of staffing revenue.

OK. The worker's compensation as we had started out the year, everybody remembers we took a large increase in our rates that we were charging our customers which the speed of getting those passed on impacted our margins in the first two quarters, and then we started getting some traction in the third quarter and that held during the fourth, and where we ended up in the fourth quarter at 29.3 percent overall, we feel with the traction that we have going there, moving into this coming year, we'll be at 29.5.

The largest movement of that component this year was worker's compensation, whereas for the year as a whole, we had guided to about a 7.8 to 8 percent, and we came in right at 7.9 percent for the year as a goal. So right in line with our guidance. The quarter ended at 7.8 percent. As we move into next year, we're seeing that to be fairly flat. We're not anticipating that that movement in that gross margin component will move significantly.

OK. And is that a reflection then of the guidance based on your year-end audit at this point?

Yes. We have already worked with our actuaries, our consultants in the various companies that help us look into the upcoming year. Just like a year ago, when we stopped and looked at our position at the end of '01 and reflected on how '02 needed to look, we've done that for '03 railroad, and so as we give guidance that will be approximately 7.8 percent, we've already taken all that into consideration.

OK. Great. Then if I could turn to revenue drivers in the quarter and what's underlying your guidance for the first quarter and for all of '03, give us a sense, if you would, for same branch revenue growth rates during the fourth quarter in one year and older branches and three year and older branches as you track them, and how that might have compared with third quarter levels.

Finally, if you could give us some sets for what you're now assuming implicitly in your guidance for the first quarter of 03 and for all of '03.

OK. In the fourth quarter of 2002, same-store sales were 3.4 percent, and that was -- sales from new stores were about 1 percent. So that would come up to a little bit over 4 percent, but if you keep in mind it would also close about 1 percent of our base. That's providing the 3.9 percent growth. Now I also referred to one additional billing day in the fourth quarter, which was about 1 percent having to do with the timing and the spread in our quarter. As we move into the first quarter of this coming year, we're very pleased with the same-store sales growth trend of around this 3 percent where we see it in the -- starting off the year. Obviously with would have hoped to be a little stronger, and that's where we talked about the uncertainty. It's not that it's become significantly weaker, we're just hoping for this thing to get stronger faster, so with same-store sales guidance of moving into the first quarter of about 3 percent.

That's based on what you saw in January, Steve?

Yes.

OK. So you're essentially telling us that your guidance both for 1Q '03 -- is predicated on the same store growth you saw in January continuing both for the balance of the first quarter and for all of '03. Os that fair?

As we move throughout the next three quarters, we hope that this traction continues and our guidance that we've given today would assume about 4.5 percent same store sales growth.

For the year as a whole?

Yes.

And for the first quarter, in that 3 percent range?

Yes.

Thanks very much.

Thanks, Adam.

We'll take our next question from Jeff Silber with Gerard Klauer.

First question actually has to do with the gross margin issue. I know some of the other companies in the staffing industry have been talking this quarter about the sizable increase in unemployment insurance, and I'm wondering if you're seeing that and roughly what the magnitude is and how you'll be able to pass that through to your clients.

Yeah, we've seen an increase there. The unemployment insurance is a much smaller component than worker's compensation so we really haven't brought that up to be a large issue. If our average rates are in the 2 to 3 percent rate, the amount of increase is really insignificant. And we do have a lot of confidence we'll get that passed through. We've put those rates into our system and our operators have had no problem keeping the gross margins consistent throughout January.

OK. Good to hear. I was also intrigued about your Labor Ready Express model, wondering if I could get a little more color on specific metrics, how that compares to your current branch model.

Sure. Let me introduce it first, Jeff. A as a team, we're looking for initiatives that increase our profits in 2004, 2005 and beyond without diluting earnings in 2003. The expresses do that. You remember the late 1990s, we used to be able to break an office even within nine months to one year. Then it went in 2000 and 2001 and 2002 that it would take 18 months for the exist model to break even. So we've been working, as Matt had said, for quite a while on designing a model that would get us back to break even in less than a year. I'll let him elaborate more on that struck structure so you can better understand it.

Morning, Jeff.

Good morning.

Some of the differences between the structure of a traditional branch that we opened in the past and an express branch, we usually look at the cost of open ago traditional branch infant past was somewhere between $40,000 and $50,000. The cost of opening an express branch would typically cost between $5,000 and $15,000, so significantly less money invested up front. That's made possible by much better use of technology but is a great deal cheaper than when we were opening branches in the past, and so that will keep the cost down up front.

Express locations represent a much smaller footprint than a traditional branch. We target between 400 and 1,000 square feet which helps keep our operating costs significantly lower than the traditional branch. Express branches are selected on some subtlely (ph) different criteria. We would identify an express market by the number of potential customers as opposed to in the past -- we use all the other criteria that we used in the past as well, but it would be a traditional branch if the customer base was potentially large enough to support a regular branch. We also select these very carefully with zero impact on surrounding Labor Ready locations in mind. We will not encourage cannibalization of any kind. We want to see incremental revenue and incremental profitability. So the total build-out cost and the operating expenses are significantly lower, allowing these operations to break even with much lower sales volumes, and we think we have a success on our hands.

Are you putting the cash dispensing machines in these Labor Ready express branches?

No, because that's 15,000 by itself.

OK. So that's another reason why the cost component is much lower.

Yes.

Sure.

That's right.

OK. I'm just curious in terms of the timing of the expected openings of these branches. Are they mostly going to be in the first half of the year?

I have challenged the operating team to have the express buildout completed before the end of the second quarter, and they will do that.

OK. And how about the UK branches in terms of timing?

The UK branches will achieve that same guideline with one caveat. The lease process, the process of gaining leases in the UK is much more complicated than it is in the United States. But I believe that based on where we are today, that we'll achieve the goal in the UK as well.

And just one final question. In 2002, international revenues rep scented roughly how much as a percentage of revenues?

You're including Canada and UK?

Yeah.

Hang on a second, Jeff. 5 percent.

5 percent is great. All right. Thanks a lot.

We'll take our next question from Charles Gunther with Wells Fargo Securities.

Hello. I was intrigued with your tax allowance allowances you discovered in the fourth quarter, and I think you explained them to an extent, but my question is this. Have you turned over all the rocks all over the US or are there other geographic areas and programs you can still get at, seeing that these apparently came to you a as somewhat a fourth quarter surprise?

Well, it's somewhat of a surprise but we've been working towards it. We identified the worker opportunity tax credits two years ago, and it took us a while to put systems and processes in place to capture the correct information. Once we had that going and good traction in making sure that we were collecting all the credits that were due to us there nationwide, then we turned to the other credits that were available, and we do have a team working on that, Chuck, and to the extent and how much it might be, I don't know. I know that they obviously went after the low-hanging fruit first, the easiest ones (ph) and the ones that are the largest. We hope to have more coming but I can't quantify if there are any.

Geographically speaking, you've gone right through the US with these things?

On the worker opportunities tax credit, yes. This empowerment zone came out in California.

The empowerment applies only to California?

That's the one that we found in the fourth quarter, yes.

OK. Now, do you think you may be finding them in other areas as well or not?

I believe we will. I'm not sure they'll be to that extent.

Seeing these things for the first time, it sort of seems logical that you could get -- in California, you could probably get it in some other places.

Yeah, we're sure working hard at it. There's quite a bunch of hoops have you to jump through to get it.

I can well imagine that.

But we're willing to jump through those hoops and we're taking the efforts to design the right processes to capture the information. It's all around the profiles of your workers, where they live and what their economic situation is, and you have to capture that information and allow these credits, you -- a lot of these credits, you can only capture it once.

So assumedly the south L.A., orchard type for this program?

Yeah, that's a good example.

OK. Thank you. That's all I had.

Thanks, Chuck.

And we'll go to Ralph Wanger for our next question.

Good morning. Glad to see progress. On the balance sheet, you've got the other assets summary of 114 million. Could you explain exactly what that is?

Yes, I will. As I'd mentioned and talked about our cash position, $95 million of that 114 is restricted cash. 5.7 million of it is marketable securities, which I also talked about.

What's the restriction on the cash?

It is to collateralize our worker's compensation programs. We've moved from using letters of credit and as you recall when we did the convertible notes offering, that cash was going to be used to collateralize our worker's compensation programs, and moving away from unsecured surety bonds and accounts receivable backed letters of credit to a more reasonable form of financing of securities with cash trusts.

OK. So that creates the interest income on the balance sheet in

Yes, and so we pick up interest income, and we also forego interest expense or financing fees on those letters of credit and bonds.

That's going to have to keep growing?

The balance you see there will hold us all the way through 2003. That will not grow in '03, that restricted cash balance.

But it will eventually will grow along with the business?

It will grow along with the worker's compensation reserves, which you recall have been growing a little bit faster than sales due to the payout patterns of our worker's compensation claims. Our average payout is in the range of five to seven years, so until we reach a stable point, the worker's compensation reserve continues to grow. But that itself is finding some stabilization. At the end of the year, the worker's compensation reserve is net of discount $85 million, and we anticipate when we get to the end of 03, it will be somewhere around $100 million. And so we're not seeing that grow like it has because of the stabilization in payroll dollars, which is the base of how you calculate your reserve.

OK. Thanks.

You bet. Thank you, Ralph.

We'll take our next question from Steven McBoyle with Lord Abbett.

Just a few questions on the Labor Ready Express concept. Is this similar to a concept that one would refer to as kind of a satellite-type branch? Is this a branch that is opened throughout the entire year and then if you could just talk to sales volumes expectations as well?

Sure can. I'll let Matt address that.

Good morning. As a matter of fact, we refer to this throughout its seminal period as a satellite program. Some of the key learnings that we got out of the testing was satellites were more typically attached to branch units and reported up through branch units. That didn't give us the level of accountability that we needed to make sure that these work as well as they can. So we made a decision to have these report directly up through a district manager, which is -- at the end is much more comfortable managing that type after business, and our chances for success skyrocketed as a result. So I hope that answers your question.

And just on expected sales volume per branch?

I have put a target for the first year of $300,000 on these units, and second-year projection of $600,000 on these units, but we have branches that have been open for a year -- we have test express units that open for a year that have significantly exceeded that goal, and at the bottom end of that scale, the ones that haven't done as well as we have liked, are on track for those numbers.

And then again, are these branches opened full year?

Typically, yes. They would be open full year. But we would take advantage of opportunities to go into markets for seasonal work.

OK. With respect to the 2003 guidance, again, relative to previous guidance in revenue of 900 to 940, now 900 to 920, again, if you could just speak to perhaps the market environment that may have had some impact on the new guidance and then more specifically I guess it's representative of 5.5 percent in growth, and I think Steve had mentioned same-store sales expectations of 4 percent. Is that incremental 1 percent again largely driven by the new store openings?

Yes, I'll address that. We gave revenue guidance of 9 to 940 (ph) back in October, and that's when we were hoping that same-store sales growth would be probably 5 to 6 percent in the first quarter. So that's where a little bit of our disappointment has come or what we've called uncertainty in this first quarter, but we're pretty -- we're fairly pleased with the range we've given on the first quarter, given the fact that we're into it five or six weeks now. It's easier to get some visibility on this first quarter. The adjustment we've made to our annual guidance is just reflective of our adjustment in the first quarter. We'd anticipate another $10 million back in October with the traction we had that the same-stores sales would be a little stronger in the first quarter. That's all we adjusted.

As we move throughout the rest of the year, we haven't really adjusted our sales growth that much. We haven't given quarterly guidance how to get to that number, but it does add up to 5.5 percent like you just mentioned, Steve, where our previous guidance was 7.5 percent.

Now, the sales from new stores will impact that, you know, so if we have 5 percent same-store sales growth in Q2-Q3-Q4, on top of that, we'll have revenue from the new stores that we're opening. Matt has given some parameters here today on what that might look like for these express units, depending on how much of the year they're hope. They would do 300,000 the first year they're open the entire year. Those 25 will be averaged between now and the next 10 weeks or so, and Labor Ready-UK, those 15 we're opening over there, they'll have an average of -- if they were open the entire year, they might be $400,000, but again, they're spread throughout the year how they're open.

So new store revenue will drive us up to that range, that midpoint guidance of $910 million. Same-store sales is about 40 million of it, new stores is about 10 million of it.

Each quarter, Steve, you know, we've committed to updating our guidance as we see the year develop, and what we're seeing, what we're -- we're confident right now with the first quarter is, and it's not that we're not confident for the rest of the year, but as we go through the year, we'll keep updating as we see it developed in the marketplace.

OK. Great. You do a good job of that. And then again, just with respect to the SG&A guidance for 03, I think you had mentioned incrementally 30 basis points related to the store openings and as well as the compensation. Just curious, is that more heavily weighted towards the store opening?

The SG&A for '03?

Correct, yes.

Yeah, the guidance that we've given, there is approximately 26 percent. Starting with the base of 220 for '02, there's four components that are driving that number up to our guidance of approximately $235 million. 3 million of it related to the 15 new branches in the UK, 3 million of it related to the 25 express units. We also have incremental transactional cost for same-store sales, and the incremental cost on that $40 million of same-store sales will be about $4 million in SG&A related to bonus plans and transactional costs. And then you just have standard inflation in your base 220 million that we had last year, which is about $4 million, so that's how we get to the 235 guidance for next year.

OK. That's great. And then just certain I know the answer but I'll just ask it. The EPS guidance of 30 cents to 35 cents, I presume that does not assume any share buybacks throughout the year at this point in time?

That has not been taken into account, you're right, Steve.

That's great. Thank you very much, guys.

Thank you, Steve.

And we'll take a follow-up question from Adam Waldo with Lehman Brothers.

Gentlemen, I just want to probe a little could if I could with Joe and Matt on the new branch manager compensation model. I know that you all have been looking at this hard for some time, and I wonder if you could give us maybe a little more quantitative discussion of the form lay involved in the model to the extent that you're comfortable sharing that on this forum, and to the extent that you're not, maybe give us a little more sense for how the branch offices in which the model has been deployed at this point, say the third or so, might have performed in terms of same-store sales growth and profit growth during the fourth quarter relative to the rest of the system.

The new branch manager formula, as Matt said, one of our first objectives is to be more inclusive, and based on the prior formula which serves the company well in the 1990's, in the current environment it had excluded quite a few of our managers, especially in the newer offices. The company's goals, while still sales-driven, is also bottom-line driven, and what we saw was a dichotomy between what the manager's compensation program was based on sales and the company's goals based on sales and profits, so the structure that we've put into place to compensate our managers now factors the targets are established for the offices as to what we expect in profits from that office before a bonus is earned. And that's an expected return for our shareholders, and an expectation as a company.

That branch manager now controls not just sales to influence this bonus, he controls every line including the most significant be staffing in his office. And as somebody else is paying for a staffing person, it seems like it's a lot better reason to have one than if it's going to come out of your bonus, and that's not -- we haven't had that under good control in the past, but now we have another participants, and that's the branch manager. So he now controls every line in his branch P & L to achieve a targeted profit. Any bonus is then paid out of an incremental profit over and above that target. So you can see the concept is first return for shareholders before earning your own bonus. And if he doesn't earn enough profits over the target to achieve the bonus under the formula, he only gets the profits over the target. So it's first dollars and so to speak.

The second part of your question was how did that impact the fourth quarter?

Really just trying to get a sense, Joe -- I know you've probably looked at sort of two test groups here, right, the third or so of the store base in which the new branch compensation model has been rolled out and the rest of the system (ph), and I wonder if you're able to sort of compare and contrast for us trends and revenue profit growth in each of the two cohorts.

Sure. I'll let Matt take that one.

It's very difficult to assign success based on the implementation of a compensation structure, but there is -- the fact of the matter is in the markets that have had the compensation program for the longest period of time, we are seeing very positive sales growth numbers, and that's exceed exceedingly encouraging for us. The other thing we're seeing is that there are a constituent group of managers who bonus very well in the old program, and that we have made a very, very clear point to our organization that no one gets hurt in this process, and so -- but those people in the test market who have chosen to stay on the old plan to see how the new one works out, we've had people switches plans because they can influence the success -- their personal success along with the business success much greater in the new plan, so it's had some very positive outcomes.

And just as another sideline, I get phone calls from branch managers asking me when it's going to come to their part of the country, and the organization is very excited about the new plan.

We've been able to manage other compensation programs to balance this one so that there's no significant increase in our cost structure, as well.

Okay, thanks a lot.

Thank you, Adam.

Before we take our next question, I would just like to give a final reminder to everyone to please press star 1 if you would like to ask a question.

And we'll now take our next question -- I'm sorry -- a follow-up question from Gerard Klauer, Jeff Silber.

I'm wondering at the end of the year how many branches did you have and did you close or open any branches during the quarter?

Sure. Steve has to get to that page, Jeff.

The branch count at the end of the quarter was 748. During the quarter, we had opened two branches and closed three branches. So a net change of one.

OK. Great. And have you opened up any of the branches you talked about for 2003 so far? Of the 45?

Yeah, just a couple start here in February.

OK.

We didn't get that moving real strong in January, but we're confident with the rollout plan and the traction that we have there on that rollout plan.

On the share buyback that you announced in mid December, did you buy back any shares in the fourth quarter?

Yes, we did. We bought back 327,000 shares, and we spent $1.9 million on those shares.

And that was in the fourth quarter?

Fourth quarter.

Were you able to buy back any stock in the current quarter yet?

Yes, in the current quarter, we've bought back 223,000 shares.

OK. And in terms of the window opening up again, when can you start being back in the market to buy back shares?

48 hours.

OK. Fantastic. Thanks.

And we'll take another follow-up question from Ralph Wanger.

Hi. On this branch manager bonus, did you say they're paid monthly?

Yes.

OK. Why did you pick -- most of us think of bonuses as sort of annual or something. Why do you do it monthly?

It's always been monthly, Ralph, based on the sales programs and cash collections, so it's an instant return so to speak, an instant reward.

Monthly payment on sales used to be called a commission more than a bonus.

Yeah, it's factored that way based on sales, but have you to achieve the bottom line before they get so-called commissions.

OK. Great. They have a very good incentive if it's every month.

Yes. I think it will also help, too, with retention of managers going forward as the economy picks up.

OK. Thank you.

Thank you, Ralph.

It appears there are no further questions at this time. I would like to turn the conference back over to Joe Sambataro for any concluding remarks.

Thank you, everyone, for attending our conference call. As usual, if should you have any questions, please feel free to call us. Have a good day.

That does conclude today's teleconference. Thank you for your participation.