TrueBlue Inc (TBI) 2004 Q4 法說會逐字稿

Good day everyone and welcome to this, the Labor Ready Fourth Quarter Earnings conference call. Today’s call is being recorded. Joining us today is Labor Ready President and CEO, Joe Sambataro, and CFO, Steve Cooper. They will discuss Labor Ready’s fourth quarter earnings results which were announced yesterday. If you have not received a copy of this announcement, please contact Lisa Litrell at 1-800-610-8920, Extension 8206 and a copy will be faxed to you. At this time, I would like to hand over the call to Miss Stacey Burke for the reading of the Safe Harbor. Please go ahead, Miss Burke.

Here with you today from Labor Ready is Joe Sambataro, President and CEO, and Steve Cooper, CFO. They will be discussion Labor Ready’s 2004 Fourth Quarter Earning results which were announced after market close. Before I hand you over to Joe I ask for your attention as I read the following Safe Harbor. Please note that in this morning’s conference call, management will reiterate forward-looking statements contained in yesterday’s 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 may be materially different. Additional information concerning factors which could cause results to differ materially is contained in the press release and in the Company’s filings with the Securities and Exchange Commission, including the report of Form 10Q filed November 15, 2004. I’ll now turn the call over to Joe Sambataro:

Thank you, Stacey. Good morning everyone 2004 was an exceptional year for Labor Ready, reflecting our leadership and providing on demand labor and our consistently strong financial and operating performance. We are pleased to have this opportunity to share with you the record annual revenue and net income we announced yesterday, reflecting a revenue increase of more than 17% and a net income increase of 110%. Revenue for the fourth quarter ended December 31, 2004 was $272 million compared to revenue of $249 million for the fourth quarter of 2003. Net income for the quarter was $10.4 million or $0.21 per share as compared to $5.2 million or $0.12 per diluted share for the fourth quarter of 2003.

The 100% improvement in net income this quarter over a year ago was driven most notable by comparable same store sales growth of 12%. A decrease in operating expenses of nearly 1 percentage point of revenue year over year and the improvement in gross margins of 170 basis points for the quarter. Steve will provide a more detailed view of our results in a moment, but I wanted to speak for a minute on our improvement in gross margin.

We have employed a comprehensive approach to keep workers compensation expenses in line, including client and worker selection, workplace accident prevention, effective claims management, and consistent application of our safety programs. As a result, we are making substantial progress in reducing our risk exposure. I would like to commend our operators and safety teams for their commitment to these efforts and their contributions to our results. Claim frequency has dropped approximately 10% from 2003. We are pointed in the right direction and our focus will remain on enhancing and maintaining these programs.

We are also seeing strong operational results and earnings leverage due to the ability of our team to execute our business strategies to first grow current branch revenues and profits, second, expand in smaller markets in the united States and Canada. Third, expand in the United Kingdom. And finally to penetrate existing and new markets with additional brands and diversification of services.

Beyond our expansion strategies of United Kingdom and smaller markets in the U.S. and Canada, we seek growth opportunities through selective acquisitions. Our growth before last year had largely been organic and focused on the strength of our core business model and fundamentals. In April of last year, we acquired Florida based Spartan Staffing and it’s on demand staffing division, Workforce We are excited about the addition of Spartan’s Staffing and Workforce to our company and will continue to consider acquisitions and expansion opportunities that increase shareholder value.

To advance our strategies to expand in smaller markets and the United Kingdom, and to grow the opportunities we see for Spartan Staffing, we plan to open approximately 35 new branches in 2005, 15 Spartan Staffing branches, 15 branches in smaller markets, and 5 branches in the United Kingdom.

We like the strength with which we entered 2005. Our balance sheet is strong and business conditions look favorable. We will continue to execute our strategies with discipline and patience. We are optimistic about 2005 and are confident in our ability to deliver long term value for our shareholders. We anticipate revenue for the first quarter of 2005 in the range of $240 to $245 million and net income per diluted share between $.09 and $.11 cents. We anticipate revenue for the year 2005 to be in the range of $1,140,000,000 to $1,160,000,000 with net income per share between $.90 and $.95.

I am extremely proud of the Company’s performance, both financially and operationally during the year and the collective efforts of our employees to deliver record revenue and net income. With just as importantly, to meet customers’ demands while maintaining strong control over expenses. In addition to building a culture of excellence and staying committed, delivering positive results for our employees, our customers and our shareholders, we remain focused on what we do best at Labor Ready - - putting people to work. I would now like to turn the call over to our EVP and CFO, Steve Cooper.

Thanks, Joe. It’s been a great quarter for us. We’re excited to be with you today and appreciate your time you’ve taken to be with us on this busy earnings time. As previously noted, revenue in the 13 week fourth quarter increased 9.4% as compared to the 14 week fourth quarter of 2003. On a comparable billing day basis, the fourth quarter revenue increased 19% over a year ago. The 9.4% increase in revenue during the quarter came from the following components. One, branches open one year or longer increased 12% This includes a 4.4% improvement in the average bill rate per hour compared to a year ago. Two, new branches open less than one year contributed 2.2% of our revenue growth and branches closed during the year accounted for a loss of 1.6% of revenue. Three, the Spartan Staffing and workforce branches we acquired at the onset of the second quarter contributed 6% of our growth. And four, one less week of revenue doe to the 13 week versus 14 week quarter a year ago, accounted for a 9.8% revenue loss.

Today we provided guidance for the first quarter that revenue is expected to be $240 to $245 million. That would be 15 to 17% growth over the first quarter of 2004. In the first quarter, we expect approximately 8 to 10% growth from same branch revenue. And the newly acquired Spartan and Workforce branches to contribute about 6%. The 2005 revenue estimate is based on trends being consistent to the first quarter projections except for the growth related to the acquired branches will only be significant in the first quarter as those branches were acquired at the onset of the second quarter in 2004.

Our gross margins in the fourth quarter were 31.4%, up from 30.9 in the third quarter of this year and up from 29.7 in Q4 a year ago. As mentioned earlier, there was a 4.4% growth in the average bill rate mix in Q4 as compared to the same quarter a year ago and the average bill rate for the year 2004 was up from 2003 by 2.9%. We are pleased with the improvement in our average bill rate as this is a significant driver in our business that signals demand is remaining strong. In addition to the bill rate having a positive impact to the quarter, we experienced one time adjustments in our workers compensation program of 60 basis points of revenue.

Workers compensation costs for 2004 were 7.3% of revenue. We had projected our cost at the beginning of the year to be approximately 8% of revenue. Workers compensations costs in the fourth quarter were 6.5% of revenue. Without the one time adjustments, workers compensations costs would have been 7.1, slightly below the year as whole. We project the 2005 workers compensation costs to be between 6.7 and 7.2% of revenue. The reduction in the ongoing workers compensation cost is related to various prevention measures that Joe has mentioned here with you today.

As we’ve experienced better than projected trends in the number of accidents, we were able to save about 10% in our costs as compared to the projected costs at the beginning of the year. With these low costs, we now expect gross margins in 2005 to average 30.5%. Selling, general and administrative costs for Q4 as a percentage of revenue were 24.1% as compared to 25% a year earlier. And SG&A for 2004 as a whole was 23.5% of revenue, as compared to 25.4% for 2003, almost 2 points lower. The driving force in our reduction in SG&A as a percentage of revenue is the growth in average branch revenue we’ve experienced.

Our main strategy for growing net income is improving the productivity of each branch location. Average revenue per branch increased to $1,278,000 in 2004 as compared to $1,144,000 in 2003, about a 12% increase. At the revenue levels recorded, SG&A costs were inline with our expectation. We plan to continue to hold the line on operating expenses in 2005. By controlling operating expenses while revenues are showing improvement, we are expecting to show the leverage we have available in our business model by reducing the annual SG&A percentage by almost another full point in 2005.

Average sales per employee increased to $360,000 in 2004 from $321,000 in 2003, also about a 12% increase. These driving forces are producing the improvement in net income as each 1% increase in revenue is estimated to drive a 4% improvement in net income. We believe that metric will hold strong going forward. By leveraging our operating costs with increased revenue volume, we had improved net income margins to 3.5% of revenue for 2004, up from 2% in 2003. Our income tax rate in 2004 was 39.3%, slightly better than the 40% we had expected. This positive variance was related to better than expected worker opportunity tax credits and some positive true ups related to our state tax expense Our income tax estimate for 2005 is between 39.5 and 40%.

Our estimated net income per share for the first quarter is expected to be $.09 to $.11, and estimated net income per share for 2005 is $.90 to $.95 cents, on an estimate fully diluted share count of 53 million shares. The balance sheet is stronger than ever with over $140 million in cash and equivalents. We have $70 million in convertible debt that we can call in June of 2005 if the stock price is above $9. We intend to call that debt if the provisions are met which will result in net debt converting to 9.6 million additional shares. These 9.6 million shares have been treated as if converted in our financial statements and our estimates.

We are excited about the potential opportunities we have to invest some of our available cash in operations through acquisitions in lines of business that are similar to our niche. We are good at serving small and medium businesses with specialty niches in on demand staffing. We believe there will be opportunities to continue adding shareholder value with our available cash by expanding into these niches. At this time, we will open up the call for any questions you may have.

[OPERATOR INSTRUCTIONS]. Your first question comes from Michel Morin of Merrill Lynch.

Yes, good morning, gentlemen. Two quick questions if I may. First off, on the same store sales figure, can you give us a bit of color as to whether or not that’s coming from existing clients just doing more business with you or if you’re actually growing your client base? And how that has trended recently? And then secondly any thoughts you have on the use of cash and in particular I know that there had been some discussion or thoughts about a dividend and I’m wondering where you’re at on that. Thank you.

Yeah, Michel, the same store sales question first and then we’ll handle the available cash and the dividend question second. The same store sale question - - we haven’t noticed a major shift in the mix of business that comes through each branch that’s related to new customers versus existing customers. Therefore, it’s a combination of both. The way we serve our current business, our current customers versus the way we procure new customers, that mix has been holding about true. So it’s coming half and half if you will.

Okay.

You can see it, too, Michel, in the number of customer count went from 2003, 275,000 to 2004, 300,000. With this added business, I was speaking with our area director that operates Florida and he’s been doing very well down there and I was congratulating him. I thought a lot of it was the hurricane clean ups and you know, there is some of that. But what happened was during the hurricane clean up, new customers came in and used Labor Ready and were so pleased with our services, that we’ve got additional customers now as result of them experiencing our service. As far as dividends, I think what we’ve laid out here today is a strategy and that strategy includes expanding into new markets with additional brands and diversification of services is how I described it. We’ve often described it as one notch up and Spartan Staffing is a good example of that. So these are going to be models that fit our customer base. We see our leverage as being 300,000 small and medium sized businesses. We’re looking at that one notch up in an acquisition that would fit that, so we have a strategy and we understand it and we have cash. And you’ve got to have both of those to make it work. And that’s what we’re looking at. We’re not going to be an acquisitive company, Michel. We’re not just going to go out and buy a collection of companies and hope it all works out. That’s not our style here. We’re going to be very selective and very specific in what we’re looking for.

Okay. And - -

That’s probably what we see in the execution of our plan going forward. As far as the dividend to answer your question directly, that’s discussed at every board meeting. But as long as we see opportunities to employ the cash, we present that to our board members and then they will make a final decision. And we think it’s something we can get a higher return by employing the cash into our strategic plan.

Okay, great. Thank you.

Your next question comes from Jim Janesky of Ryan Bank & Co.

Hi. Yes, good morning, Joe and Steve. A couple of questions if I may. The first question has to do with the U.K. You talked about the number of offices that you’ll be opening there, roughly 5. What have you found as we had talked about that opportunity in the past. I mean, have you found that that’s going better than expected and there’s an opportunity to possibly open up more offices? Or what are your thoughts?

One of the differences in the U.K. versus opening in Chicago is that they have - - we have it operating by all individuals who are British except one expatriate. So the number of offices they can open is somewhat limited to how fast their people can grow within that group. They’ve done a great job and their performance is above our expectations. We went into London and London is like going into New York City And that’s been consuming a lot of the management time and it’s working, but it’s just taking more time than we thought. We didn’t want to burden them with too many new offices this year, but rather to absorb what they have and generate the target of profit that we expect. We’re working on longer term strategies for international. Many times I get asked the questions, well what’s your plan beyond the U.K.? Right now our focus is the U.K. and remains that. But we’re working and trying to understand where the other opportunities are. Not so much for next year, as we are looking at it for a 5 to 10 year horizon. And I think we’ll have an opportunity to share more of that with you in the fall of 2005 as our target when we develop our plans for the following year and beyond.

Okay, thank you. And as we look at your, the 4 to 1 ratio of operating leverage, and as you look out to the $.90 to $.95 number that you folks have talked about for 2005, that leverage is not 4 to 1, it’s actually lower than that. Are there opportunities for the margins to continue to expand? Or is there always going to be, as new office open and mature, there’s always going to be a bit of a lag there?

Well, when we speak of margins we need to be clear. We’re very comfortable with our gross margin that where it’s operating at is close to peak performance and we’re not looking for margin expansion at the gross margin line. Definitely at the EBIT line there is room for expansion and most of that is coming from leverage of doing more business over the same counters. And as we model this 1 to 4 ratio, that’s with consistency of 30% gross margins, adding in 5% new store base, that we can maintain a 1 to 4 ratio there. Now is it always going to be perfect or is it always going to work exactly? The answer is no. But in concept and in our planning stages, that’s the model that we used and we’ve actually been outperforming that. It’s not been less than that, it’s been more than that. It’s been better leverage than that. But that’s been because of that pricing increases that have gone beyond what we modeled into that 1 to 4 model. So we need to hold our gross margins to 30.5% like we modeled for ‘05 and then improve same store sales 8% and we can get that 1 to 4 ratio including adding in 5% of our store base.

Okay, great. Thanks. And then as a final question, have you found that it’s been difficult at all finding temps for the increased number of orders that you’ve had from your clients? Or has the kind of programs you’ve put in place for recruiting both branch managers and therefore your temps, been paying off?

We’ve had no shortage in temporary workers. I say that in a broad statement. Once in awhile a branch might experience a shortage or when we had the hurricanes in Florida, they went out looking for everybody they could find to work. But on a broad basis, we’ve got an adequate supply of workers. How we’re recruiting and the fact that there’s - - we’ve talked about lower skilled workers have fewer opportunities sometimes, so there’s quite a few of them that are still looking for work and we’re putting them to work.

Okay, great. Thank you.

Your next question comes from Mark Marcon of Wachovia Securities.

Good morning, Joe and Steve, and congratulations on a great quarter. I’m just wondering, with regards to the bill rate increase that you experienced, would that bill rate increase be on a same branch revenue basis if we excluded Spartan?

Well, an overall mix is what that is.

Yeah, I guess I was wondering how much did Spartan positively impact that?

Not much because our average bill rate companied for the year as a whole was $12.62 and our average for Spartan is actually $12.28. And that’s because it’s Florida based. And so California drives $2 or $3 extra in bill rate than Florida does.

Got it.

So it’s not the business model niche difference, it’s the geographical location difference. But it’s not significant enough that it’s going to drive, it’s going to change it much.

Okay, and how - - what sort of bill rate increase would you expect for ‘05?

I would imagine - - we’re modeling in something like a 2% change. We’re obviously getting out of ’04 trending higher than that, but with where our margins are at and the fact that there aren’t a lot of cost increases this year. There were some minimum wage increases, I believe, in 8 states, but they were minimum and they weren’t in the large states. So we’re not looking to drive that bill rate up higher than we need to cover our cost structure. We need to stay competitive out there, so it’s not one of our strategies right now.

Okay. And then with regards to the gross margin that was experienced in the quarter, I remember that there was a $4 million novation charge which you disclosed in the 8K. It also sounds like there were some accrual reversals. I was wondering if you could kind of go through the details of that and then how should we - - it sounds like we got a benefit for this quarter, but if I’m thinking about things correctly, it looks like you actually got penalizes in terms of the full year numbers. So I was wondering if you could kind of go through that.

Yeah, I’m just going to cover it in broad terms just so we don’t let the details bog us down here with things that don’t matter. We’ve disclosed here that 60 basis points of our margin improvement in Q4 was related to certain adjustments that didn’t belong in the quarter, I’ll put it that way. Some of them did belong in the year as a whole, but they didn’t belong in the quarter. So we tried to normalize gross margins in Q4 and that’s where we came down to you back out that 60 basis points and you get into the high 30s or not quite 31% of normalized margins. And that’s why we’ve guided to 30.5.

Now what’s in that 60 basis points? Let me just discuss that for a moment. There are some offsetting items in there. On January 7th, we filed an 8K describing that we had a novation of all of our insurance costs from Kemper to AIG. And that’s well described in that 8K, so people can refer back to that and follow up with any questions they may have. But what that did was relive Kemper of their ongoing obligation. They gave back all the collateral we had which happened to be $65 million and then we placed $48 million of that with AIG. And so we really had a positive working capital gain of $17 million because of that transaction in cash because the programs were set up differently.

Under the Kemper program, we placed collateral with them and then we pay our own claims and then would have to go back to them and ask for collateral release. In other words, they’d have to reimburse us and give us our money back. Kemper was in bad shape. We didn’t like that structure. And we had the opportunity to move it to AIG in a situation where we place the collateral with AIG and then they pay the claims out of that collateral. So it’s self reducing and that’s just a better structure and it was the proper amount of collateral and we’re very excited about that. Plus there’s an interest rate on that that’s very competitive when it’s with them, so there’s a lot of benefit there. And to do that entire transaction, there was $4 million of additional expense in the quarter.

Now we knew that transaction was coming, so we had estimated that into our estimates for Q4. We also knew that the year was progressing very well on our work comp trends and that our accident ratio was actually 10% below the trends of a year ago. And our actuaries, when they started the year, they gave us numbers that they didn’t have that information. And as the year started progressing, we were having conversations with them as they gave us each update that said, wow, we’ve noticed a difference. And if these trends continue, you’ll most likely, and I’ll speak in round numbers, have about $1 million per quarter coming back to you that we’ve told you to over accrue for the current year. So approximately $3 million then we thought would be coming for Q1, 2 and 3 and then another $1 million reduction in our Q4 run rate. So we knew that that $4 million was probably going to cover the $4 million of the novation and therefore in our estimates, we didn’t go to this level of detail, we just gave broad based estimates and it was all covered. And it all turned out that way.

However, in addition to that, there was also some adjustment for prior years, ’03 and earlier, mainly driven by the exact same thing. That our accident trends when we finished ’03 weren’t as strong as the actuaries ultimately anticipated. So we ended up with some more adjustments related to prior year which net, net, net of all of the costs and all the adjustments ended up to be about $1.7 million. You take the novation, you take the current year adjustment and you take how much related to prior year - - it was just 60 basis points. So we called it out in the press release and just said in the quarter there’s 60 basis points of credits that won’t be recurring based on that one quarter. However, there is $1 million of ongoing less cost. And that’s why in the other sentence we say there’s 110 basis points of improvement besides the 60. About 40 basis points of that is the ongoing cost reduction. So therefore, that’s why we’re guiding our gross margins a little bit higher and our work comp percentage we’re guiding to 6.7 and 7.2 when we just came off of a 7.1 to 7.3 year. So we’ve built in that 40 basis points of ongoing improvement into that guidance.

Got it. And so it sounds like it would be fair to say that the quarterly - - we can all do the math in terms of this quarter, but for the full year, earnings are probably understated probably by, given the one time charge, probably offset by some of the gains, probably about a penny or two, would that be correct?

Possibly. Because of the one time novation, is that what you’re asking?

Right.

Sure, you could look at it that way.

Okay, great. And then in terms of the workers comp expectations for ‘05, are you building in any sort of improvement in California, given some of the talk about some of the new programs that are coming out?

Well, it’s starting to show up. But it’s not as significant as this accident trend we’re having and so we haven’t called it out separately yet. Maybe - - there’s a lot of talk, you’re right. But we’re fairly cautious in saying it’s kinds of show me the money. Let me see this thing show up. I see some policy changes and I see some environment changes and, but no, we haven’t built that into any of our trends, Mark.

So if that were to work, that could be a benefit?

Absolutely.

We’re focused on what we control which is preventing accidents to the extent we can. And our safety programs, that’s really where our focus is, and if - - we certainly don’t control California legislation, but we could benefit from it.

Great. And then can you just give us the cap ex and D&A expectations for the year?

For ‘05? Yeah, we’re looking probably about $6 million in cap ex and D&A around $9 million.

Great. I’ll come back on with some additional questions. Thanks.

Your next quest incomes from Craig Peckham of Jeffries & Company.

Hi, Joe. Hi, Steve. The 12% same store sales number - - you said that 4.4% came from bill rate increases. I wondered if you can help us delineate how much of that is coming from I suppose changes in the mix of business by geography or type of work. Or how much might be coming from explicit price increases.

Yeah, it’s really hard for us to call out. I can tell you a couple of trends that are driving this, but to call it out more than just on a couple of instances would be difficult for us. One, we mentioned quite a bit on our analyst day back in September that we made the decision to stop serving some low margin work which caused our sales growth to suffer in July and August. And so that’s part of it. When you get rid of that low margin work, it’s lower bill rate work and that drove the mix up in the fall, so as we shoed maybe a percentage point gain over where we’ve been trending for the year, the fourth quarter is probably one point higher than the year as whole. So I’m just going to say directionally about that came from firing those lower, that customer mix. It might have been related to that.

The other significant driver is California. We really made a conscious effort there to get that state right sized. And what I mean that is making sure the bill rates we’re charging in the State of California are covering all the anticipated costs that might be going into serving customers down there. Ad we took that opportunity during 2004 knowing that we might not have a lot of sales growth because we needed to drive our bill rates up. And in some instances we’ve taken our bill rate up $2 down there. And that’s significant when as a company as a whole, our bill rate moved from in the Labor Ready division $12.26 to $12.62, so it didn’t even move a full $.50. But in California it was as much as $2.

So California is definitely driving that bill rate up. But it’s making us insure that we’re profitable, that it’s covering it’s own costs, and we’re very, very pleased with what happened there this year. In cleaning up the work comp side and getting the bill rate straight, we’re very pleased with being in that state. Very pleased with the performance. And now we can grow from that base. We can grow from where we’re at and the volume will start coming to us now. And we really didn’t lose any top line revenue. We did lose a little bit of volume, but we picked it up in bill rate increases for those that we continued to choose to serve in that state. So those are the 2 major drivers, Craig. Beyond that, it’s very spread across the board.

Okay, fair enough. And I would assume that the fourth quarter you certainly saw some health in the same store line from the hurricanes if that came maybe from the Spartan footprint. Can you size that for us? And I wondered if, Joe, I think you had mentioned that you were able to kind of sustain some revenues through new clients you found in the hurricane. Is it similar type of work or can you give a little more color on that?

Well, for example, a contractor would get busy after the hurricane and once that work was done, he had experienced our services and so would continue at that point, would be one example.

Yeah, in general, Craig, the hurricanes - - they’re driving some fundamental underlying demand in the state of Florida, but as far as clean up, no, that wasn’t a huge impact. It was a nice little blip but it went fast. It did hurt revenue for awhile and it came back, but that’s behind us. But there’s no doubt the hurricanes created some backlog of construction that will take years to complete in that state and that’s going to benefit us. We’re seeing double digit growth in Florida and we’ve seen double digit growth for several years in a row now. And I think this just insures there’s going to be a long demand for workers in the state of Florida for along time to come. But it’s not really anymore responsible for driving the same store sales number than the other states because in the fourth quarter, although Florida had a nice bump, we had other, a lot of other states in a lot of other regions that had states that were close to keeping up with them. So it’s not, it wasn’t a huge driver, but it was a driver.

Okay. My last question, I wondered about some of the safety programs that you put into place last year. Have those been deployed across the entire branch network or are there still other regions or offices that you haven’t push it through as far?

Yeah, some of them have been taken. Let me just speak to the main one that we started with in California. We attacked it from two fronts. One is client selection and one is worker selection. And we put tools in place to screen clients better and screen workers better. At the same time, part of that client screening was putting safety specialist on the ground. People that really know and understand safety. And although it’s always been our branches’ responsibility to go out and do safety site selection, it still is their responsibility, but now we’ve given them a great resource Where, in unique situations, large situations, and then in just random situations, these safety specialists go to our customers’ sites and insure that not only our workers are safe but the customers’ workers are safe also. So it’s a little bit of an added vale that we can provide along the way. But it’s truly made a difference to our own workers.

So of all the tools we put in place in California, yes, we are spreading those throughout other operating areas. Not blanket though. We’re using which tools can be effective in which areas of the country. And there’s certain pockets that we need to have better worker screenings and we’re putting it in place. There’s some markets that need better customer selection or site selection and we’re putting that in place. So we’re being selective in how we roll it out. We put it all in California because it all was necessary to attack that front. But we’ll be selective in where we put it elsewhere. But I’ll tell you what. Our operators are thrilled with the results that they’re getting from those tools and they want to use them. They want those tools to their benefit to serve their customers better and protect our workers along the way. So it’s always neat when the operators are driving these tools and that’s exactly where it’s at. They’re making the decision on a day in and day out basis which tools to use.

Craig, one of our values as a company is respect and the way we describe it is respect for the workers bring that person home safe. Our operators have a worker safety ratio by branch, by district, by area. And that ratio of number of accidents to number of hours worked is looked at on a regular basis and evaluated and measured and where improvement trends are positive, we reinforce that. Where trends are negative, we go in and provide assistance like Steve was talking about. California obviously was a high return state. But beyond that, we are selective and because there’s a cost to these programs and sometimes the cost can exceed the benefit because they’re already doing extremely well. So it’s a focused effort.

thanks, and Joe, congratulations on the two year extension.

Thanks, it was free.

Your next question comes from Randy Mehl of Robert W. Baird.

Hey, good morning, and congratulations on the quarter. I’m just wondering if you can outline the same store sales trend by month throughout the quarter and then into January?

Joe’s pointing at me for some reason. I better turn the page.

I don’t have all the detail in front of me.

Same store sales by month, is that what you want?

Yeah.

Okay, I’ll go back. I know we’ve already given these numbers in October, but August was 6.1, September was 8.2. That’s when we kind of announced that we saw a change because if you recall back, June was 12, July was 6.6, August was 6.1. We saw a fall off that’s what we were referring to. But on our October call that’s when we were a little bit excited but cautious also because we’d seen a significant change back to these 10% or so same store sales. So are we get into the fourth quarter, came out of September at 8.2, October was 11.5, November was 9.9 and December was 14.6.

Now let me make a comment about December. The two holiday weeks were extremely strong and that’s what drove December’s higher than the other two months. There - - it was just strong for various reasons. One the holiday wasn’t mid week. And being towards a weekend always helps us. But more importantly, we feel strongly that when small and medium businesses have backlogs, they keep working during holiday weeks. And that’s where we’re experienced right now. We’ve seen that trend stronger in ‘03, stronger in ‘04, and as we finished ‘04, it was as strong as we’ve seen it since the late 90s. Holiday weeks don’t look like holiday weeks and they remain strong. So that drove December up because it was stronger than ‘03. We like that backlog. It feels good to us. So I think the fact that we see that, that bodes well of ‘05.

What did you say for January trends so far?

I didn’t give that number. Moving into January, it’s not running at the 14% rate, but it’s running to the normalized Q4 numbers that we saw. If you just averaged ‘04, maybe take a couple of points out of December because of those holiday weeks, January’s right on track with that.

And did you say in your Q1 guidance that you were assuming same store sales growth of around 8%? Or I might have misheard that.

Yeah, we have a 2 point swing in the guidance that we gave from the 240 to 245 and that includes an 8% same store sales outlook.

If you’re growing right now at about 12%, is that just building in a little bit of conservatism then?

No the quarter ended about 10, but that’s the holiday weeks. The quarter was running at a good strong 10 besides those 2 holiday weeks.

Okay, well thank you.

Your next question comes from Jeff Silber of Harris Nesbitt.

Thanks, I know it’s late so I’ll just ask a few quick ones. You were talking earlier about California. Can you disclose roughly what California is as a percentage of your total revenues?

It’s just less than 20%. It’s about 18 right now.

And how has that changed over the past few years?

It was running around 20%, so it’s fallen off about 2% mainly because not because it’s revenue shrank, it just didn’t grow in proportion to the growth that we saw. Plus we added the Spartan in it and that’s outside of California. So California did not shrink during ‘04, but it didn’t grow at the same rate as everybody else. But we’re okay with that, because we got nice bill rate increases and we’re poised well for ‘05 now.

Sure. Some times on an annual basis, you’ve disclosed roughly what your capacity utilization is. I was wondering if you could do the same thing now.

That’s a rough estimate we use, Jeff, and that really hasn’t changed much. We’re feeling that number one, although we’ve seen some expansion in our offices, the market as a whole is growing and we’ve made the comment that we could be running around 50% of our capacity. With our average branch running just under $1.3 million per branch, we’re probably slightly above 505 at this point. But we’re making some headway there. We’d like to see our average branches at 2.2 to $2.5 million, so you can see we’re making a little bit of headway there. And it’s the leverage model that’s even more exciting than the average branch revenue is that average sales per point. That is just really exciting to see that productivity gain there.

Okay, great.

We view that, Jeff, as recruiting capacity and the leverage in the past tense in on the ramp and the fixed costs in the branches. What Steve is referring to is our largest costs as a company is obviously salaries, so when you leverage that, you get even higher returns.

Oh, sure. Just from a modeling perspective, if you do decide to redeem the convert, just want to double check, this will just be sort of a debt to stock conversion. There will be no cash trading hands in this transaction?

Yeah, that’s correct.

That’s right.

Okay. And then finally just a general comment. You were talking a little bit earlier sort of California versus Florida. If we kind of look at the landscape by function, were there certain pockets of strength or weakness by the different industries you serve?

Yeah, it’s pretty much holding across the board. We’re not seeing big pieces being driven by construction or manufacturing. There was a moment there last summer that manufacturing was outpacing construction, but we believe right now that the business mix is growing proportionate in all material respects.

There’s been no real substantial changes.

Okay, that’s very helpful. Thanks again.

Your next question comes from Jim Wilson of JMP Securities.

Mostly everything’s been pretty well covered but just, I guess, sort of one last geographic thing. You gave us some very good color, but any - - in the mix of store openings going forward and given correct business trends, any increased focus or shift as to where additional openings may occur) Given these trends or given where you stand in California now for instance, any changes in philosophy?

Well our 15 Spartan branches was part of the mix that we talked about and that’s going to be primarily in the southeast working off of their Tampa headquarters. The 15 smaller markets are pretty well spread out throughout the country and Canada.

As it stands, your bigger markets you’re pretty comfortable with current existing store base?

Yes. Our focus in metro areas in many of our stores is to grow the existing branch not to open nearby branches. Any branch that opens, any new branch that opens, area directors need to assure us that it’s more than 25 miles from an existing branch.

Got it. Okay. All right, great. Great quarter.

Again, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Evan Morrell of Criterion.

Good morning, guys. Congratulations on your quarter. I was wondering if you would talk a little bit about the Spartan expansion. How long will it take for you guys to know? Because if I’m not mistaken, this is your first big expansion of those branches. How long will it take for you to know whether the team down there has the ability to really grow this business and turn it into something that you can take nationwide?

One of the criteria, Even, when we look at Spartan, was its management team. And it was independent of the owner who subsequently retired. One of our criteria when we evaluated the acquisition was the ability of that management team to take that business model and expand it. We’ve given them an aggressive schedule on top of their existing roughly 10 branches, but they have the full support of Labor Ready. And many of our operators in Labor Ready have come from the staffing business and can provide that additional support they need. So we didn’t just give them 15 and say you’re on your own. We’re providing a lot of support, of course, but they’re leading the charge, and so far, we’re very impressed. So I have high confidence to answer your question in timing, while clearly we have skills, they’re just opening the branches now. And we’ll see how they ramp up during the year.

So do you think that the effect of the new branches will be evident this year or will it take more than one year to understand whether it’s going to be a successful rollout?

The way we look at it is more of a ramp up, Evan. And so we have certain expectations on the ramp up of a new branch and those are different than a ramp up of a Labor Ready branch because the relationships are longer term and it takes more time to build. But we have our expectations pretty well outlined and that’s how we’ll evaluate. Many of these sites that they’re opening, they would have opened on their own had they not been acquired. They just didn’t have the financial resources to do that. So many of these sites, they already have a demand. When you take these individual locations, Evan, and we’ve built a relationship between Spartan and those local Labor Ready branches, as well as they have sometimes in some case Workforce branches. So we’ve built an incentive system so that they’re not going into a town cold. They’re getting referrals from the Labor Ready branches of our existing customers. So that’s going to make a big difference than if they just did it on their own of course.

So, as I said, we have 300,000 customers and in each city we have a major Labor Ready branch and those referrals and cross referrals can support and will help, I think ,ensure success And that’s our strategy on a larger scale basis for this next notch up, is to leverage not only our 300,000 customers which are small and medium sized businesses, and that’s where Spartan focuses, but also we have 600,000 workers. And in the staffing business, they often are challenged by finding the workers they need. And part of our worker base, the upper tier of our worker base with some training, will be a great resource for workers as well. So that’s the dynamics on a larger scale, not just the 15 branches.

Great. And if the 15 branch rollout is successful, do you think you have the ability to grow that at a faster pace than in the years to come or is 15 sort of what would be expected on an annual basis? Do you expect that there is obviously markets that can [inaudible]?

No, we’ll have to evaluate 2006 later in the fall for that number of branches, but what happens is when you get a larger base, so you go from 10 to 25, that gives you more ability to open additional offices. Many hands make light work is how Labor Ready got to over 800. And so we don’t have numbers yet for Spartan ‘06 openings, but I think the larger the base, the easier it is to open. The challenge is really in this first year of 10 going to 25. And they’ve got the support for that.

Great. Thanks again and keep up the good work guys.

Your next question comes from Jim Fargo of Ranier Investment Management.

Great execution, guys. My questions have been answered. Thank you.

Your next question comes from Mark Marcon of Wachovia Securities.

A question in terms of the investments that you might end up making in terms of Spartan like entities. Can you talk a little bit about what you’re seeing in terms of prices for those light industrial companies of that size? And can you remind everybody in terms of kind of your return criteria in terms of minimum return that you would expect?

Well, we have been doing a little bit of homework here and trying to figure that out ourselves, Mark. You know we’re quite disciplined in our approach to financial management of this company, so the criteria is quite high in what we’re willing. And we do look at it from an ROI perspective for starters. The amount of invested capital that we put into one of those acquisitions has got to be adequate to continue to contribute to the shareholders. Our return on assets is approaching 10% this year and our return on invested capital is approaching 20. So with those two criteria out there, we very much respect that we’re getting that out of our current operations and those are going to be benchmarks for us. We’re going to look at those. How those come back to a multiple of cash flow or such, it’s pretty easy to do your math from there. A range of 4 to 5 times EBITDA or cash flow drives to those types of returns on investment for you.

And are you seeing attractive or potentially attractive candidates at those prices, particularly now that the economy is getting a little bit better on the light industrial side?

Well, it’s probably too early for us to tell what’s really there because for one, we have to sort through our own strategies of what we’re willing to give up on our criteria. Any time you start bringing anybody into the fold, they’re not exactly what we are, and obviously they might not even be exactly of where we’re headed. So we’re cautions in number one, can we run the business? So we’re going through those steps first. Can we run the business? Is it a business that we can see ourselves running and managing and driving the metrics out like we have as a Labor Ready model? And when we can answer those questions, that we know we can run those businesses and drive the metrics of performance that are expected for our shareholders, then we’ll move to the next step. And then we’ll determine whether we can get it for the right price. So pricing is a little ahead of ourselves right now.

Mark, the - - before we even get to financial analysis, they have to pass 3 tests. On the first test that they have to be operating their company on the same value system that we operate ours and that’s an important criteria to us. Second, they have to have a management team that’s independent of the owner that can successfully operate the business going forward. We’re not just buying a business, we’re buying the management team and the people. And third, they can’t be a broken company. We want well run companies, not broken companies. So those 3 criteria come well before pricing.

Got it. Great. And what would you expect DSOs - - how would you expect DSOs to trend next year?

Right in line with where they’re at. We completed this year real close to where we were last year. It’s just a little in excess of 30 and we intend to keep them there,

Great job. Okay, thank you.

Your next question comes from Mike Carney of Stephens.

Hey, congratulations, everyone. Steve, I know - - I’ve been on and off and I haven’t heard everything, but did you happen to mention the workers comp expense impact from the change in the insurance provider to AIG?

Yes. We went through quite an in-depth analysis for that, Mike.

What was the impact? That’s all I need.

Yeah. The impact is part of that 60 basis points that we put in the press release of certain one time adjustments, if you will. So that was net of positive improvements we’ve seen and our reserves came down, so it was netted. The net impact was $1.7 million. The Novations cost was $4 million. So net of everything else, the reserve impact was $5.7 million.

Got it. Thanks.

Again, if you would like to ask a question, please press star then the number one on your telephone keypad. We will again pause to compile the Q&A roster. At this time, there are no further questions. Mr. Sambataro, are there any closing remarks?

Yeah. Well, thank you everyone for attending today. We’re very excited going into ‘05 and if you have any further questions, feel free to call myself or Steve. Thanks again.

Thank you. This concludes today’s Labor Ready 2004 fourth quarter earnings conference call. You may now disconnect.