TrueBlue Inc (TBI) 2004 Q3 法說會逐字稿

Good morning, my name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Labor Ready third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask as question during this time simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you Mr. Sambataro you may begin your conference.

Let me begin, here with you today from Labor Ready is Joe Sambataro, President and Chief Executive Officer and Steve Cooper, Chief Financial Officer. They will be discussing Labor Ready’s 2004 third quarter earnings results, which were announced after market closed yesterday. Before I hand you over to Joe, I ask for your attention as I read the following safe harbor. Please note that in this mornings 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 the expectations reflected in these statements are reasonable, actual results maybe materially different. Additional information concerning factors which could cause results to differ materially is contained in the press release and the company’s filings with the Securities and Exchange Commission including the report on form 10Q filed July 30th 2004. I’ll now turn the call over to Joe Sambataro.

Thank you Stacey. Good morning everyone. Yesterday we announced revenue of $296 million for the third quarter ended October 1st 2004 compared to revenue of $254 million for the third quarter of 2003. Net income for the quarter was $15.6 million or 31 cents per diluted share compared to net income of $10 million or 22 cents per diluted share for the third quarter of 2003. Steve will provide more detail about Labor Ready’s strong performance this quarter in a few minutes. 51% improvement in net income this quarter over a year ago was driven most notably by an increase in same store sales and the operating leverage of our existing branch network and the improvement in gross margins for the quarter. In the third quarter, our branches opened one year or longer increased revenue 7% over the third quarter a year ago. We will continue to focus on our ability to deliver more sales over the same fixed cost structure and achieve that 4 to 1 ratio I have spoken of before, mainly the opportunity to produce an approximate 4% increase net income on each 1% growth of same branch revenue.

The improvement in gross margins was primarily driven by a reduction of Worker’s Compensation costs, a better pricing environment and our company wide commitment to reject low margin work. For some time now, we have been working diligently to expand our safety procedures in regard to our temporary workers to reduce risk exposure through better client selection. We are making significant progress in reducing our overall Worker’s Compensation expense through these programs. I would like to commend Labor Ready operators for their efforts to reduce the company’s risk for better client selection while remaining committed to worker health and safety. Safety is priority one. That is not just a slogan, it is our commitment to our workers. As a result, Worker’s Compensation claims are declining providing significant savings.

On April 5th of this year we purchased Spartan Staffing. Its two brands, Workforce and Spartan Staffing provided 6% of Labor Ready’s 16% year over year revenue growth during the third quarter and continues to make a positive contribution to the company’s net income results. We look forward to growth of these brands. They certainly are meeting our expectations. We plan to open up approximately 35 new branches in 2005, (technical gap) money within the U.S and U.K and 15 Spartan Staffing branches. We anticipate revenue for the fourth quarter of 2004 in the range of $265 million to $269 million and net income per diluted share between 13 cents and 15 cents. We anticipate revenue for the year to be in the range of $1,037,000,000 to $1,041,000,000 with net income per diluted share between 68 and 70cents, a 67%- 72% increase over 2003. The expected earnings per share growth in 2004 are on top of a 46% increase in 2003 and a 22% increase in 2002. We have certainly demonstrated to our shareholders, the ability to significantly increase earnings on a consistent basis over the last three years. Again, we are pleased with our performance for the quarter. The success of this quarter is (inaudible) to the continued drive and focus of our employees to increase revenue and profitability while serving our more than 275,000 customers. By allowing our 600,000 temporary employees to enjoy flexibility and independence. Our teams continue to deliver results as they put people to work. I would like to turn the call over to our Chief Financial Officer, Steve Cooper.

Thank you Joe. Good morning everyone. As previously noted, revenue in the third quarter increased 16% as compared to the third quarter 2003. The increase in revenue during the quarter, primarily came from the following three components. One, branches opened one year or longer increased 7.1% including a 3.1% improvement in the average bill rate per hour compared to a year ago. Two, new branches open one year or less contributed about 2% of our revenue growth and three, the Spartan staffing and work force branches, we purchased them at the onset of the second quarter, contributed 6% of our revenue growth. It should be noted that the fluctuations in foreign currencies as compared to a year ago has coincided. It was only about ½ of 1% of our revenue growth during the quarter. Today we provided guidance for the fourth quarter that revenues expected to be $265m to $269m. That would be a 7%-8% growth over the fourth quarter 2003. In the fourth quarter, we expect 8% growth from same branch revenue. We also estimate growth for new branches of approximately 2% as the newly acquired Spartan and Workforce branches do contribute about 6%. That’s is a total growth of about 16%. However, the fourth quarter 2003 was 14 week quarter compared to 13 week quarter this year. The loss of one weeks billing is expected to result in 9% less revenue during the fourth on a comparable basis.

Our guidance for 2004, as a whole is revenues between $1,037,000,000 and $1,041,000,000 were approximately 16% growth over 2003. This estimated growth for 2004 is expected to be broken down as follows. 10% growth in same branch revenue, 2% growth in revenue from new branches, 6% contributed from the newly acquired Spartan/ Workforce branches, and a reduction in revenue related to the loss of one week of revenue in Q4 as we move back to a 52 week accounting year versus the 53 week year we had in 2003. This change will result in a loss of about 2% in annual revenues. Our gross margins in the third quarter were 30.9% up from 30.1% in Q3 of last year and up from 29.9% in Q2 this year. Some of this improvement is attributed to turning away low price work and part of it this shift was attributed to increasing bill rates in certain areas of our operations. As mentioned earlier, there was a 3.1% growth in average bill rate charged in Q3 as compared to the same quarter a year ago.

In addition to the bill, right mix having a positive impact during the quarter, we experienced lower cost related to our workers’ compensation programs of 40 basis points of revenue as compared to the third quarter of 2003.

We said last quarter that we expected the cost of workers’ compensation for 2004 to be about 7.7% of revenue. We now expect that cost to be about 7.3%. This reduction in workers’ compensation costs is related to various provision majors implemented that have reduced our accident rate by about 10% this year.

On a year-over-year basis, we expect a lower cost of workers’ compensation to continue throughout the remainder of 2004 and into 2005. We now expect gross margins in the fourth quarter to exceed 30%. An achievement considering the seasonally lower gross margins we often see in the colder months. It is worth noting that the acquired branches of Spartan & Workforce reduced our overall blended gross margins by about 50 basis points. But for our blended gross margins to be at 30%, our Labor Ready operations are producing merely 31% gross margins. We are very pleased with that performance as it has not hindered our ability to grow the top line.

Selling, general administration costs for Q3 as a percentage of revenues were 21.2% as compared to 22.5% a year earlier. A driving force in our reduction in SG&A percentage is the growth in average branch revenue. At the revenue levels reported, SG&A costs were inline with our expectations. We plan to continue to hold the line on operating expenses. By controlling operating costs, while revenues are showing improvement, we are expecting to slow the leverage we have available in business model by reducing the annual SG&A percentage to approximately 23.5% for 2004, almost two full percentage points less than 2003. By leveraging our operating costs with increased revenue volumes, we expect to improve operating income margin to 5.9% of revenue for 2004 as a whole, up from 3.6% for 2003.

Our income tax expectation for 2004 remains unchanged at approximately 40%. Our estimated net income per share for the fourth quarter is expected to be $0.13 to $0.15, an estimated net income per share for 2004 on a fully diluted share of 52.4m shares.

As noted in the press release yesterday, we modified our policy of selecting discount rate related to our workers’ compensation reserves. Under our old policy, we used A-grade bond rates as the basis for selecting our discount rates. We have modified our policy to use risk-free treasury instruments as the basis for selecting our discount rates. Accounting guidance states that for employment-based liabilities, such as pensions, discount rates comparable to high-grade corporate bonds may be used, which is the guidance we use to select our historical rate. Other accounting guidance states that product or environmental liabilities should be discounted using the risk-free rate of return. We have modified our policy to use the risk-free rate of return as of 2004. Pursuit to this policy change, we have adjusted our 2004 discount rate to 3.8%, from 5% used in the first two quarters of 2004. This change resulted in a reduction of year-to-date net income of $1m, which is reflected in the third quarter 2004 net income announced today.

Since this rate change for 2004 was selected using a different underlying basis, the risk-free rate of return versus the A-grade bond rate, we are evaluating whether the change should also be applied to prior periods in our open financing periods of 2001 through 2003. If so, the financial statements for those prior periods may be restated to reflect a reduction in net income in those prior periods. The aggregate amount of this reduction is not expected to exceed $2.4m of net income reductions over the three-year period in those open finances. This policy change has no impact on cash flow for any of the periods reported and by decreasing the amount of discount taken in any given period, it will result in a corresponding reduction in discount amortization expense in future periods, resulting in nothing more than a tiny difference as to when the non-cash expense was reported.

As this time we will open up the call for any questions you may have.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number 1 on your telephone key pad. We will pause for just a moment to compile a Q&A roster.

The first question comes from Mark O’Connell with Wachovia Securities.

Mark O’Connell: Hi. Good morning and congratulations. Perfect quarter.

Thanks, Mark.

Mark O’Connell: I was wondering…it sounds like your same-store sales trends in terms of the guidance for Q4 would represent a bit of an acceleration relative to Q3. My understanding that, you know, Q3 was negatively impacted by the reduction in terms of some of your lower margin accounts as you were disciplined and trimmed some of those. Can you talk a little bit about what you are seeing in the market that would lead you to re-accelerate the same-store branch projections? Then I’ve got a follow-up…

Mark, as we noted in our analyst meeting in September, we had seen a fall off of our trims from Q2 as we were going out throughout Q3. Now, I am going to go ahead and give you the same-store sales by month, now, so you can see what we were seeing. As previously reported--and I’ll just restate what July was although we gave this in our last quarter--July same-store sales was 12.1 %. As we moved into the third quarter--excuse me that was June’s number, 12.1%--as we moved into the third quarter, July was 6.6%, August was 6.1%, and September is 8.2%. And as previously noted in our conference in September, we talked about making the choice to not continue doing business with certain low margin work. And that definitely impacted our growth rate for the month of July and August. We also spoke to the storms that were pounded the Southeast and that had a slight impact on those rates also. From the middle of September forward though, we have seen those rates come back and we are pleased with that and we are now projecting that the fourth quarter will look muck like how September looked, which is the 8-9% same-store sales rate. So there was definitely a little bit of decrease in those summer months, some of it by our own doing, some of it by the storms, and possibly some of it by economic conditions. But we are pleased that we did see a bounce and we are projecting fourth quarter to look like September.

Mark O’Connell: That’s terrific. Can u give us some sort of quantification in terms of what the negative impact was in terms of reduction of some of those lower margin accounts?

Yes. It was very quiet. If you recall we brought our top line guidance down in September by about $3m. So, it can be assumed that the things I just mentioned, in range of $3-4m was a result of choosing not do work with low margin accounts. The impact of the storms in the Southeast and possibly a slight slow down in economy during the summer months that we saw. But that is not a very big variation, a very big trend that for all those components only all add up to $3 or $4m reduction of which we have now seen to bounce and part of that $3-$4m reduction was spread out over the last half of the year. And now that we have seemed to bounce, we have put that back in our guidance and we are very pleased to see that we are going to able to project 8-9%. In the middle of September, we didn’t know if this 6% would hold for the rest of the year. And if so, the revenue guidance that we gave in September would have helped but now that we feel confident with how September came in on a whole and we moving in the first couple weeks of October. We are a little more confident that our projections for the rest of the year with 8-9% same-store sales.

Mark O’Connell: Great. Can you talk a little bit about the new store openings for’05 that you announced, specifically the split between the UK and US if there is any sort of guidance there and then as it relates to the Spartan branches, where would those typically go and how are they going to end up working with your existing labor ready branches?

Sure, Mark I can cover that, as I mentioned were going to open 35 branches, from that the first (inaudible) 35 branches of which 15 will be Spartan branches. The newest branches will be primarily in the southeast. A number of those branches they already had on the drawing board prior to the time we acquired them, due to capital limitations, they weren’t able to go forward, so we are very confident in the number of theses branches will ramp up fairly quickly. Then we are going to expand beyond the Florida region(ph) to parts of the southeast including Texas, they have a couple branches starting, so 15 Spartans are going to be operated under the name of Spartan , Now in separate locations all using the same referral model that they have had for years at Workfoce or existing Labor Ready branches. This will be our first step out and it is exciting.

Our people are excited; lots of opportunities to cross refer business as well as possibly employees. Additional training and semi-skilled job, and earn a higher wage for them and their families as well as a higher bill rate. (Inaudible) up to 25 is going to be in smaller markets in the United States and Canada, that’s a continuation of our rollout into the smaller markets. We can (inaudible)will become some what full size branches from which 4 or 5 will be in the UK. In the UK our proxy there this year 2005 is to fill out the districts to be expanded into London, as a new district. We want to fill out our districts and put a little more time under the belt of the district managers there, just a full load before moving into 2006. Remaining five will be sprinkled somewhere in the United States as full size branches.

Mark O’Connell: Terrific, Can you talk about what kind of trends you saw in the Spartan branches, just in terms of year over year organic growth. I know obviously you didn’t own them a year ago but can you give us a feel for how there trending.

Well Spartan is made up of two divisions, one is Spartan and the other is Workforce, Spartan is the semi skilled, high end branches, and then there are 16 work force branches where the work force is identical to Labor Ready. Primarily in Florida and as a result Florida has been doing well both for labor ready and Spartan. Were seeing some nice increases in their branches as we’ve seen in our Florida branches. (inaudible)

Mark O’Connell: Perfect, thank you

Question comes from Abraham Fisher of Harris Nesbitt.

Hi Guys, I’m calling in for Jeff, just wanted to clarify, the one million dollars for the change in the discount rate that was all taken in the third quarter.

Yes it was

And there is nothing instrumental, it was just a one time thing.

The catch up for the first two periods of 04. The 04 discount all caught up through the quarter

Ok, and what was the interest on the (inaudible)

Its 6.25, is the coupon on that, and the outstanding balance is 70 million dollars.

That’s just a –I can figure that out – roughly $800,000

That would be the tax effected impact, If you trying to compute the impact to diluted shares, then you would take that 6.25 times the 70 million dollars, that would give you your gross amount, you tax affect it by the 40% tax rate, that would give you an amount you’d have to add back net income, the complete your dilusion. And don’t forget we have an amortization of debt issuance costs for about 150 thousand dollars a quarter, which you also have to tax effect.

It looks like in the quarter you closed some branch offices. I was wondering if you could talk about some of the locations

I think there was approximately a net closing of around of 11. and as we mentioned on previous calls, and with the 830 someodd branches, we are constantly monitoring the performance of our branches, why they close or relocate them, and new ones through the quarter, this particular quarter has been going through third quarter, certain branches that we would have expected to build up in the summer months, if they didn’t ramp up like we thought, then we’d shut them down and so net 11, I don’t expect that there would be that many in the fourth quarter, but as I always say your going to constantly open where we see quick ramp ups in less than a year of profitability, if you reach profitability cumulatively in less than a year, if we see for some that there are some that’s just not getting the traction we expect then we close them.

Can you break down how you got to that (inaudible)

Hold on let me see if I can look that up, no openings just 11 closings.

Got you, I’m just looking at the model, it looks like you usually add about 5% new branches year over year, you were short of that this year obviously.

That’s kinda an estimate that we use, just so we can get a longer term guidance as to what our thought process is, really what were doing is…your referring to the 35 for next year, or were you actually for 04.

actually both

Well were we come out for 04 is, has to do with Joe’s answer to the last question, that is throughout the year we make an adjustments, we mostly give that guidance, so people can see what our long term strategy is, and then they can model in the expense structure of where we’re taking this, and the 5% of the base is more than 35, however 15 of these openings, have to do with part opening and they are more uncertain for us, we haven’t open that many of that model before and therefore we have scaled back the percentage a little bit for 05, so we can exercise a little caution, b/c we’re not sure about the operating start up losses. So it really gives us a chance to model in and say here’s what we expect out our same stores sales and profit and heres an allocation for new startup losses. We don’t want to exceed that dollar amount of allocation, normally if it was just labor ready our cookie cutter operation, we know we could open about 5% and we can hit our target, however since somebody is writing a new model we are being a little bit more cautious here, not going to take it all in the 5% in 04, or 05, excuse me, for that purpose.

As you get up the learning curve on this (inaudible) do you expect to keep that 5% target?

Yea we could, again it is an allocation of start up losses, and then depending on where we are opening, is what will guide how many exact openings. Again it costs more to open in the UK, then it does the US and the Spartan model, were just unsure of what the start up losses will be

another way to look on it too is that there are 9 Spartan branches, going from 9-24 for a staff supported by labor ready people, that’s quite a growth, and so we can open more Spartans, improve—roll this out, and we expect them to be as successful, now (inaudible), so that’s our plans right now.

Thank you I just have a few more quick follow ups. You mentioned on the call, mentioned earlier that 3.1% growth and average bill rates. Do you have an average wage rate?

Yes I can get that for you. For the quarter the average pay rate went up 1.7%

1.7% average pay rate? Is that the same as wage rate?

yes.

Thank you. And what were the DSOs for the quarter.

I’m just going to get to that page.

It was in the press release you bulked a lot of accounts receivables into one line item?

Right, yes. The calculations we have it for Q3 of ’04 is 35 days… 35.1 days versus 35.7 days a year ago, so it’s in line with the seasonality of where were at a year ago.

Great. Okay.

The third quarter is always our highest quarter in our calculations for that.

Thank you. Thank a lot, I’ll turn it over.

Alright thank you.

Your next question comes from Mike Carney with Steven

Hey guys, congratulations. A couple of questions here, first Steve, workers Comp expense total, did you say that?

I’ll grab it for you Mike. Work Comp as a percentage of our staffing revenue was 7.1%

Now does that include the revision upwards in the amortization or not, is that in another line?

Yes. Let me give you a little bit of breakdown on that. Since we’re experiencing a lower accident rate, our projection going forward is 7.3% and we came in at 7.1% during the quarter and the difference there is this impact of changing discount rates was 50 basis points. Along with that though, since we’re experiencing a lower accident rate we also had to catch up in our reserve adjustment for the year of 70 basis points. So the discount rate went one way, the impact of changing expect losses related to the prior periods were 70 basis points, the net impact was 20 basis points. So we came in at 7.1 versus our expected run rate of 7.3

Okay good.

As compared to a year ago, it was at 7.5 and more importantly it’s compared to last quarter, which was, our expectation was 7.7 so we’ve really taken a true 40 basis points our of our run rate that’s the most important thing to note.

Okay. On the bill rate up over 3% that’s relatively high compared to many years. How much of that do you think was, or was any of it due to getting rid of some of the lower margin assignments business?

Yes definitely it’s impacted by that Mike and our gut feel would be about 1% is that bill rate mix is related to getting rid of the lower margin work.

Okay so we’ll see that for another 12 months or another 9months or so?

Not necessarily. That was a one quarter worth of adjustments and what we’re projecting on quarter is a 2% bill rate increase versus the 3.1 that we had during the quarter. That’s what I was projecting.

A lower bill rate, we’re just not interested Mike. It (inaudible) work. Most importantly neither is our field operators and so we have a discipline in the field that basically -- set minimums and walk away from what we consider profitable work. That discipline state is strong in the field.

Also in the increased demand you’ve seen recently has that been across, geographies or is it, have you seen a higher pickup in the southeast?

Yeah, it’s no one territory. There was as wing in the southeast. August you had a lot of storms in the first part of September and the last half of September and October there’s been a swing in the southeast because of that but how that impacts the company as a whole it’s not very significant. Really there’s been no significant change in any geography that we operate in.

It’s been pretty broad based and as I mentioned, I might have mentioned at the analyst meeting that the Florida storms, when they … just before they are coming businesses have shut down including ours and after the storm, there’s cleanup work but you’re somewhat limited to the number of workers. Over the six month period after these storms, there is a number of rebuilding projects that we expect will be a positive influence on sales. When you take Florida as one state out of our 50, it’s not material. The entire consolidated financials, and the advice I gave at the analyst meeting is don’t buy our stock or sell our stock based on the weather.

Okay, and Joe on the acquisition, do you plan, are you going to phase out the workforce name and make those Labor Ready, are you ever going to expand the Workforce and also on the pipeline, how does that look, not the companies that are going to buy Labor Ready but those companies you will buy?

Sure. The first part of your question is are we going to phase out the workforce brand, absolutely not. I tell a story that in a town in Florida, we thought we owned that town with significant revenue in that branch it was like $2.5m from one branch. We acquired workforce and we found out that workforce right across the street Mike was doing $2.5m so guess what, we didn’t own the town. So the point is if we were to merge that brand into Labor Ready, the only result would be a loss of business and we’d save a nickel, you know, it’s material. So there is no great consolidation and savings to be had because our branch is running pretty low ramped and so does theirs. Most of all they have been doing a great job serving their customers as we have ours. So in that situation the tide rises, the (inaudible) all boats goes up. Whether we’ll expand it or not is something that we’re looking at, we’re looking at a couple of branches now in Florida where they had plans to expand. We won’t expand it if it’s just going to take away from Labor Ready, but we will expand it if it’s going put us in a stronger position relative to our competitors in that community and getting a greater market share. That’s how we look at it.

As far as our other acquisition, we are not an acquisitive company, we are not looking to do roll-ups or anything of that sort, but we keep our eyes open for other opportunities like Spartan to expand in the States primarily with semi-skilled staffing. If something comes along that we think fits our model and has strong management, first criteria because we want them to operate it, two, it’s got to have a strong value system, we’re not interested in companies that operate out of compliance with any of the laws or do a strong value system of their own. It’s got to be profitable. We’re not looking to fix any companies and finally, they’ve got to be accretive if we’re going to acquire them so we got to get them at the right price. But that’s what we’re looking for. If the opportunity comes up, we’ll pursue it. And I think it will be the right decision when expanding the semi-skilled staffing area. It will also bring in some greater returns for our shareholders.

Okay thanks and last question, given AIG’s trouble, how easy would it be to switch insurers if needed in the future and is it pretty competitive in the premium rate at the capital commitments that you’d have to up if you would have to switch?

Yes Mike we stay real close to the insurance market and we’ve got choices. We’re very comfortable with AIG and their position and this news on AIG is no alarming to us at all. So, we’re not concerned. The news being that they had trouble with one brokerage firm. That’s not the broker we use and the area that they are getting their hand slap for has nothing to do with Labor Ready, but if need be, we have changed insurance before and it’s not a big issue for us and we have other relationships built with other carriers.

Okay. Thanks

Thank you.

Your next question comes from Craig Peckham with Jeffries.

Good morning Joe. Good morning Steve. I’ve got a question about workers’ compensation. Some of the benefits you’re getting - - it sounds like it’s coming mainly from improvements and frequency. To what extent is severity playing a role here in some of the benefits on that front?

We’re not seeing that - - the impact right now Craig. And we might be - - for the reason - - we might be seeing improvement there but medical inflation continues to march forward, and so the impact that we’re having in the severity area might be cancelled by medical inflation, but it’s truly hard to tear that apart and all I know is that we’ve got to keep marching forward in prevention and in cost control and price management of which we’re attacking both fronts with full steam. And maybe we need to attack that claims cost just to keep up with medical inflation. But the exciting part is, the frequency does fall through the bottom line. And so, we can celebrate that piece of it and as long as we don’t see severity go up, we know that we are at least heading off inflation.

And important too Craig is fewer people are being injured and the bottom line, that’s one of our values is respect for our workers. We tell our operators is that greatest respect that you give to a worker’s bring him home safe. Don’t put them on an unsafe assignment and that passion is throughout the company and it’s showing up.

And can you attribute any of the improvement on work comp to, I suppose, early changes in the market? I’m thinking specifically about California and some of the reforms that are brewing there?

Well, we’re tracking it closely, but as of yet, the cost reductions that we’ve projected in or have taken in our 04 reduction did not have anything to do with the California bill. So, if that’s yet to materialize that will materialize in the future period but we’ve not yet projected that in.

Okay. I just wanted to clarify on your budget from your branches next year. 35 that is a - -is that - -that’s a gross number right?

Yes.

Okay and then as we think about- - Joe, I guess the 4 to 1 ratio you’ve spoken of and obviously have stood real well against that to come out into this recovery here. How sustainable do you think that relationship is? I mean, I would think that obviously that as the growth starts to moderate that becomes more difficult to do. I was wondering - -give a little bit of a sense in terms of how long that leveraged rate could play out.

We see it lasting. We see it sustainable because what we’re saying is for every 1% increase in the same-store-sales there is a corresponding 4% increase in earnings. That’s sustainable, one for two reasons. First because of the model we have and the leverage we have in our structures, or so to speak, our existing branches and their ability to put more sales over that same counter either from bulk of community or from national accounts that would put more sales over those same counters.

And secondly, it’s also built in with the assumption of a 4 to 5% increase for branches. So, as long as we’re within our 4 to 5% in new branches, we expect that 4 to one ratio to be …at least a four to one ratio --

Craig, what drives that is the math beyond - - behind giving the 30% gross margin on the next incremental dollar you bring in the door and the variable costs related to the next dollar is only about 6 or 8%. So, that’s what drives it and makes it sustainable. Once you build the branch and you have your fixed cost structure in place, each incremental sales dollar brings 30 cents of gross profit with only a 6 to 8% variable cost associated. So, you’ve got a contribution rate of 20 or 22 cents per dollar. That’s what drives up [Indiscernible].

Okay and my last question. Was there any kind of pruning of the portfolio in the Spartan Force branch? Or was that entirely in the traditional Labor Ready (inaudible)?

That’s in the Labor Ready branches, I’d say it was [Indiscernible]. When we look at next year too Craig, when you said that the 35 gross - - yeah, those are our plans for opening but we also have other branches that our area directors are bringing to us and saying this is a ramp up, I’ll commit to it being ramped up and profitable within a year. They put their reputation on the line and if we see that demographic supporting that we’ll open it and at the same time the reverse side of that if we see the reverse side of that if we see the situation not ramping up like we expect, even if it is not a loss, even it’s a small profit, we don’t expect it to ramp up then we’re not going to keep that branch and - -So, next year, on top of the 35 continue some other very selective openings and other selective closing but we kind of worked through that as a team during the year, driven marginally by our area directors and our regional vice-presidents.

So, 35 is gross but you might still see a net change plus or minus based on net operating costs. It’s kind of like I said before only 831 stocks [technical difficulty] well we’ve managed that.

Right. Sorry. I don’t think I phrased my question very well. What I was referring to was the - -when you talked about turning away some of the lower margin business, was there any of that happening in the Spartan business?

No, no. Most of it was in the Labor Ready and quite a bit of it was on the onsite work that’s gotten very competitive out there and other companies are willing to come in and do it for rates that we’re just not going to go there. We’ll just let it go -- it wasn’t in the workforce expiring…

Okay. Thanks.

Once again, if you would like to ask a question, please press * then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your next question comes from Randy Mel with Robert W. Baird.

Bill and Steven, congratulations on a solid quarter here. I wanted to - - most of my questions have been answered, but I just want to follow-up on a couple of them. On the last one, how were the gross margins trends when you isolate Spartan and workforce?

I’ll look that up for you Randy.

I’ll ask another one then while you’re looking it up. How concentrated were the bill rate increases geographically? I’m wondering if this happens largely in 1 or 2 areas or if it was fairly evenly distributed.

Yeah. Let me answer that question first. The - - why we’re going to speak in generality is because we don’t give geography or specific segment reporting by geographies. But what I can speak to as a follow-up to how Joe answered that last question of where we pruned this low margin work-at and that was primarily in the south-east. No, it wasn’t in the Spartan workforce branches but it was primarily in the south-east and Joe said - - related to onsite and part of the 11 closings that we had were branches that were onsite. That they were actually on the customer site and we chose not to be on that site anymore because of the low margins.

So, the closing and the trimming low margin work are all related and - - so, that covers that on the south-east. Primarily the bill rate increase are spread in general terms. However, we do have strength in bill rate increases in the state of California. But that’s where high cost increases have been also. So, that’s where that bill rate increase comes. Beyond that, I don’t think we can really give you more breakdown that can be meaningful to you.

No. That was actually helpful. I was wondering if it was something that was entirely California-driven or if it was distributed more evenly than that. It sound like you had some, you know, the south-east in California probably carried it.

Right. Both the things are bulk of that. That’s reasonably Randy.

Okay.

Can you restate your first question.

Yeah. I was just looking for gross margin trends in the acquired businesses in Spartan and workforce?

Okay. They’re similar to when we bought the business. That hasn’t been an impact to this point in time

And no real deterioration?

No deterioration at all if any thing slightly stronger.

Okay and then you’d mentioned a reserve adjustment in Q3 any reason to expect another reserve adjustment in the forth quarter?

Well we’re continuing to drive down accident rates and actuarial trend follow the real performance. So we’re stating we’ve driven our accident ratio down 10% that’s how it’s showing up because we build our reserves based on the prediction of the actuary and their prediction is based on historical trends. And if those two don’t match you could expect to bring down in reserve. But it’s hard to predict the amount and it’s hard to predict the timing.

Would it be fair to say that 70 basis point impact from that would be on the high side? You know normally.

I would think so, that would be fair to say.

Okay thank you very much, I appreciate that.

Thanks Randy.

I have a follow up question from Mark O’Connell with Wachovia Securities.

Mark O’Connell: A follow up to Randy’s question, did the bill rates go up outside of California and the South East?

Yes they go up to cover general wage inflation and general cost inflation, so we just don’t share state by state or geography by geography. But it wasn’t just California.

Mark O’Connell: Yes did they go up in excess of wage inflation or just at that rate?

No our margins across the border have been strengthening in every area that we offer it in. There has been no deterioration.

Mark O’Connell: Okay great and then with regard to you know driving down the accident rate has your mix of business changed at all in terms of you know the wide verticals that you typically end up serving? Or are you just pruning selective clients?

You know it’s mostly the second that we’ve pruned selected clients. But we have to have really, really good proof to get into certain industries now. Those are – its not a category that we had a lot of revenue in either. For instance before we serve a roofer, before some body puts our worker up on the roof they have to go through a pretty strong certification with us and site selection excuse me, safety, site safety reviews. And our safety specialist have to be out there and they got to be really good long term customer. If it’s just some one that we don’t know in the roofing business calls us and ask us to send workers we wont do it without pretty extensive stuff. So we haven’t eliminated any industry it’s mostly customer based selections.

Mark O’Connell: And then with regards to the improvement in gross margins on a year-over-year basis do you know when we strip out all the one time changes it sounds like that should carry through at least through the second quarter of next year, should it not?

Yes that’s our feeling, that’s why we gave a run rate of 7.3% of revenue. So which is really a 40 basis points improvement over where we were giving you guidance last quarter. And yes we feel that’s sustainable.

Mark O’Connell: Great and then since you’re opening up a smaller number of new stores and they are typically cost generators, is it possible that – I know that the same branch revenue growth in FY ‘04 was terrific I’m not sure where would project the exact amount going into ’05. But given the lower you know drag from new stores, is it possible that we could see you know similar, not quite as strong, but similar sort of trends in terms of operating margin expansion as we did this year?

Well keep in mind we’ve already commented that we’ve cut back on those types of openings but we have these Spartan openings we have to blend it with.

Mark O’Connell: Right.

So we have the same branch planning metrics that we use that tells us what we expect out of the branches that we already have opened. And then we plan for an allocation if you will of operating loses to get new sites open and up and running and actually absorb the cost as they become profitable.

Mark O’Connell: Right.

So we balance the port folio of new openings we’re going to have based on this allocation of operating losses that we are willing to absorb against our same branch profit. So we’ve balance that Mark to a point where we feel the risk is similar to or the mix is similar to 2004. And to help us drive that ratio of 4:1 so we don’t get out of sync on as we grow our business we still have a ratio of profitability.

Mark O’Connell: Got it thank you.

Your next question comes from Jim Wilson with JMB Security.

Hi Jim.

Hello can you hear me?

Now we can.

Okay sorry, I just – sorry I got on late I was on another call, but could you give any color of what the internal growth rate and or expectation of any geographic color to it? I know where you discussed where the billing rate in fact went up most but does that also correspond to where general revenue growth and sales is increased as well? And can you just color the demand for your services on a regional basis I guess that what (indiscernible).

I think in general of what we’ve spoken to here on this call already and our take on this is there hasn’t been a strong geographic change since last quarter. We didn’t see any large momentum shift downward or upward from what we’ve spoken to in our last quarterly call. That’s a generalize statement. Then beyond that we’ve spoken to the South East slightly that in a couple of things impacted the South East. One, our own choice to get out of the low margin work that impacted our own results. In addition to that the storms in August and early September greatly impacted our trend during the quarter. And we saw those trends reverse and get back to more of our expectation at the end of September into these first couple weeks of October.

I’ll give you the same sale store numbers by month Jim. In June which was the last month of the last quarter we came off of the 12.1% in same store sale number, moving into July and August which is when we really got out of this on site business of a few – just a handful of locations down in the South East, our internal growth rates dropped to 6.6%. In August it was 6.1% and actually in the first couple of weeks in September it was trending more along the 6.6.

However at the end of September it strengthened the last three weeks, September finished at 8.2. And we’ve made the comment moving into October that October looks more like the last couple weeks of September and we like that 8 to 9% same store sales range that we’re at. The storms have gone away in the South East thank goodness. There is a lot of work down there that needs to be done that’s driving our trends back up ward slightly. But again that’s only about 5 or 6% of our revenue down there in that state. So that’s not going to drive the over all company trends a lot, but it does have an impact on it.

Okay thanks great. Okay very good thanks a lot.

At this time there are no further questions. Gentlemen are there any closing remarks?

Thank you everyone for joining us on our conference call and for helping us celebrate our success this part quarter. Congratulations to the Boston fans and sympathy along with me to the Yankee fans. Thanks a lot and have a great day.

This concludes today’s conference call, you may now disconnect.