TrueBlue Inc (TBI) 2005 Q1 法說會逐字稿

Good day, everyone. And welcome to this Labor Ready 2005 First 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 will discuss Labor Ready's First Quarter Earnings results, which were announced yesterday. If you have not received a copy of this announcement, please contact Lisa Litrell (ph) 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 Ms. Stacey Burke for the reading of the Safe Harbor. Please go ahead Ms. Burke.

You will see 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 2005 First Quarter Earnings results, which were announced after market close yesterday. Please note that our press release includes an income statement, balance sheet and cash flow statement, all of which are now available on our website at laborready.com. 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 filing with the Securities and Exchange Commission including the report on Form 10-K filed March 11, 2005. I will now turn the call over to Joe Sambataro

Okay. Thank you, Stacy. Good morning everyone. After a great year in fiscal 2004, Labor Ready overcame our usual first quarter seasonality and got off to an outstanding start in fiscal 2005. We are certainly pleased with the strength of the results for the first quarter with better than expected revenue of $243 million, 16% higher than the $209 million for the first quarter of 2004. Net income for the quarter was $9.4 million or $0.19 per share, as compared to 700,000 or $0.02 per share for the first quarter of 2004.

Once again, the strength of our numbers this quarter was due in part to our ability to get strong topline growth, as well as, improved gross margins. Steve will provide a more detailed view of our results in a moment, but I wanted to take a minute and thank the Labor Ready Team for another great quarter.

As we have discussed before, we plan to drive revenue and earnings growth by continuing the focus on our four strategies, to grow current branch revenues and profits, expand in smaller markets of United States and Canada, expand in the United Kingdom and penetrate existing and new markets with additional brands and diversification of services. This quarter we made solid progress on several of those strategies and are executing well against our plan. Most notably, record net income for the quarter and gross margins of 31.3%.

We are also succeeding with our strategy to increase market share in the UK and increase the profitability of the existing branch locations. We've opened three branches in the UK this year and plan to one more in Q2. We are pleased with the performance of our existing branches. Overall the UK continues to perform as expected and we believe we have finding additional growth opportunities.

We saw an opportunity to expand a number of Spartan Staffing branch locations and opened six branches in Q1 for a total of 16 operating Spartan branches. Overall, Spartan Staffing is doing well and we believe there is an opportunity to capture even more sales by providing a greater service offering to existing customers as well serve new customers. We are comfortable with the growth we are seeing in this division and will continue to look for opportunities to grow our company through acquisitions and expansion opportunities that increase shareholder value.

We are currently operating 834 branches and plan to open 11 additional branches in the remaining quarters of 2005, 7 branches in the United States and Canada, 3 Spartan branches and 1 in the UK. We like the strength with which we entered 2005. We are pleased to see that strength throughout most of the first quarter. Business conditions continue to look favorable and we expect revenue from same-stores sales growth of about 7% in the second quarter.

We anticipate revenue for the second quarter of 2005 in the range of 285 million to 290 million and net income per diluted share between $0.26 and $0.28. We anticipate revenue for the year to be in the range of 1.13 billion to 1.15 billion, with net income per share between $1.00 and $1.05.

We also announced today that Labor Ready is calling for redemption its 6.25% convertible subordinated notes due in 2007. The aggregate principal amount outstanding is $70 million. If all the notes are converted, Labor Ready will issue approximately 9.6 million shares of Labor Ready common stock. These shares have already been considered outstanding on as if converted basis when computing fully diluted earnings per share since their issuance in 2002 as well as in our guidance going forward.

In summary, I am extremely proud of the company's performance both financially and operationally during the quarter. The results Labor Ready posted in quarter one demonstrate the continued success of our business model and the collective efforts of our employees who focus on increasing sales, improving gross margins, reducing cost, growing shareholder value by increasing profitability, serving customers and finally putting people to work. These are the elements we are measuring ourselves by everyday throughout our organization. With that, I will turn the call over to Executive Vice President and Chief Financial Officer, Steven Cooper for the financial review.

Thank you, Joe. I will be reviewing with you this morning some of our revenue trends, our gross margin trends, our SG&A trends and finally net income. We will open up the call for some questions. As previously noted, revenue for the first quarter increased 16.4% as compared to the first quarter of 2004. The increase in revenue during the quarter came from the following components.

One, branches opened one year or longer increased 10.5% including 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 80 basis points of our revenue growth. Three, branches closed during the year accounted for a loss of revenue of 1.5%. Four, the Spartan and Workforce branches we acquired at the onset of the second quarter in 2004 contributed 6.4% of our revenue growth. And, five currency fluctuations accounted for the remaining difference of 20 basis points.

Today, we provided guidance for the second quarter that revenue is expected to be $285 to $290 million, that would be about 7% growth over the second quarter of 2004, which is primarily same branch revenue as the Spartan and Workforce branches acquired at the beginning of the second quarter in 2004 will now be in our same branch revenue comparison starting in Q2 and not adding growth from newly acquired revenue. The 2005 revenue estimate is based on growth trends remaining stable in that 7% to 8% range for the remaining three quarters in 2005.

Our gross margins in the first quarter were 31.3%, up from 29.1% in Q1 a year ago. As mentioned earlier there was a 4.4% growth in the average bill rate mix in Q1 as compared to the same quarter a year ago. We are pleased with the continued improvement in our average bill rate as the bill rate improvements were consistent with the fourth quarter of 2004. Bill rate improvement is a significant driver in our business, which signals strong demand.

In addition to the average bill rate improvement having a positive impact on the fact during the quarter, we again experienced adjustments to our Workers' Compensation reserves of 70 basis points of revenue. Current period Workers' Compensation costs for 2005 are running about 7.2% of revenue as compared to 8% in the first quarter of 2004. In addition to the lower run rate, we have also experienced a 70 basis point impact from prior period reserves being lowered by our actuaries 2 quarters in a row, which has brought the Workers' Compensation cost in about 6.5% for the last two quarters. We continue to project 2005 compensate - Workers' Compensation cost to be about 7.2% of revenue.

The reduction in ongoing Workers' Compensation cost is related to the various prevention measures implemented that have reduced our accident rate by about 10% over the trend in the beginning of 2004.

We continue to expect gross margins for the remaining quarters of 2005 to average about 30.5%. Selling, general administration cost for Q1 as a percentage of revenue were 24.4% as compared to 27% a year earlier. The driving force in our reduction in SG&A percentage is the growth in average branch revenue we have experienced. Our core strategy for growing net income continues to be the improving productivity from each branch occasion.

Average trailing 12 months revenue per branch increased to $1.31 million in the first quarter as compared to $1.175 million in Q1 of 2004. That's about a 12% increase. This improvement is exciting to us, and is including the average in the new locations that we have opened over the past year. At the revenue levels recorded, SG&A costs were in line with our expectations. We plan to continue to hold the line on operating expenses in 2005 with the only significant increase in SG&A projected coming from the opening of the 30 additional new locations net of the closings we have had since Q2 of last year

Selling, general administration cost for Q1 as a percentage of revenue were 24.4% as compared to 27% a year earlier. The driving force in our reduction in SG&A percentage is the growth in average financial revenue we have experienced. Our core strategy for growing net income continues to be the improving productivity from each financial occasion.

Average trading 12 months revenue per branch increased to $1.31 million in the first quarter as compared to $1.175 million in Q1 of 2004. That's about as 12% increase. This improvement is exciting to us, including the average in the new locations that we have opened over the past year. At the revenue levels recorded SG&A cost were in line of our expectations. We plan to continue to hold the line and operating expenses in 2005 with the only significant increase in SG&A projected coming from the opening of the 30 additional new locations that at closings we have had since Q2 of last year.

By controlling operating cost while revenues were continuing to show improvement, we are expecting to show the leverage we have available in our business model by reducing the annual SG&A percentage by almost 100 basis point in 2005 as compared to 2004. Average trailing 12 months sales increased to $371,000 in Q1 of 2005. That's up from $352,000 in Q1 a year ago.

The driving forces of more sales per branch and more sales per employee are producing a stronger growth rate in the net income as compared to the sales growth percentage. We believe that trend will hold strong as that leverage will continue to get in our -- the leverage we get in our business model continues as we continue to focus on our key strategy in improving productivity at each branch and each employee.

By leveraging our operating costs with increased revenue volumes, we have improved our net income margin to 3.8% of revenue for the first quarter. And on a trailing four-quarter basis, we have produce net income margins of over 4%, up from 3.5%, which we recorded in 2004 as a whole and 2% for 2003. We are pleased with the continued improvement in operating leverage we are seeing. And as mentioned earlier, we believe we can continue to leverage our costs further, which is the driving factor that is improving our net income margins.

Our income tax rate in Q1 was 37.6%, an improvement over Q1 a year ago of 40%. That improvement is due to the worker opportunity tax credits being in place this year and they were not in place in Q1 a year ago. Our income tax estimate for 2005 is estimated to be about 38%. The balance sheet is stronger than ever with over $148 million in cash and equivalents.

As Joe mentioned, we have 70 million in convertible notes that we called for redemption today, April 21st. These notes will be redeemed for cash on June 20th, unless the holders of notes convert their notes into common shares before June 16th. The conversion price is $7.26, which equates to 9.6 million shares to be issued if all noteholders choose to convert, which we fully anticipate will happen. These 9.6 million shares have been treated as if converted in our financial statements and estimates since issuance in June of 2002 in every quarter unless they were anti-dilutive. And they are currently treated as if converted in our 2005 estimates, which we gave today. Therefore, the issuance of the share will not be further dilutive to our net income reported or to our net income guidance discussed here today.

We are excited about the potential opportunities we have to invest our available cash on hand into operations through acquisitions in lines of business that are similar to our niche. We are confident in our ability to serve small and medium businesses or specialty niches in on demand starting . It has been one year since our acquisition of Spartan Staffing and we are pleased with the performance of that division as they have made a positive impact on our organization and on our results. We believe there will be opportunities to continue adding shareholder value with our available cash by expanding our reach to other small businesses in need of staffing on demand. At this time, we will open up the call for any questions you may have.

(Operator instructions) Your first question comes from Mike Carney of Stephens.

Good morning I was just wondering if you could beat my estimate by $0.30 next quarter.

Okay.

And then.

Well, you are a five star analyst, so you tell us.

No, really the cost leveraging control continues to be really good and with operating expenses over only up 5% year-over-year. Was there anything that was unusual or extraordinary or is that going to be probably the run rate going forward. I notice that bad debt expense was maybe a little lower than normal but it just seems like you have obviously done a really good job even with the cost leverage to control that line.

Thanks, I appreciate that.

Yes, there is nothing unusual here Mike and going forward we are really comfortable with our ability to take this 100 basis points out of our -- as a percentage of revenue throughout '05 so we think this trend will continue on and it really is reflective of what we've discussed here just getting the leverage out of the costs we have in place. So we are really not implementing further cost control this is more cost containment and we have metrics that were measuring to make sure that we are not adding costs that we are not getting productivity out of.

And then, Steve, can you give the trends right now?

The inter-quarter transfer, same store sales?

Yes.

Yes. January 12.8%, February 12.7%, March 7.1%, I want to throw a caveat on there for March that Easter was in March in '05 and in '04 it was in April. That might have impacted that same store sales number I just gave by about a point so...

And what about a trend after the quarter, will you comment on that?

Yes, it's interesting because again we had Easter in the first couple weeks of '04 we are kind of balancing out of last two weeks of March came with the first two weeks of April and I think it's reflected in the growth rate that we have given here today for Q2.

Okay and finally has there been any change in the business activity groups where you're seeing the growth from? Is construction still strong as it was, Is manufacturing where is was or has there been any change?

There hasn't been a large change there. It's, you know, our base is so large at this point that it has to be something very significant for it to pop out as being a concern to us, as we have mentioned in the past there's more geographic swings than are vertical lines swings and we watch those geographies. There's no doubt that weather patterns in various cities impact our results from time to time. Economic conditions in certain geographies impact our results from time to time. There's no doubt that weather impacts construction worse -- more than manufacturing. So there are just so many variables there, we don't really try to get overly concerned on any one or two week even a 4 or 5 week basis on those trends that's -- The basic answer there Mike is we are not concerned about any shifting

Okay. Thanks. Congrats.

Thanks.

Our next question comes from Michel Morin of Merrill Lynch.

Good morning, guys. I just want to drill down a bit further on your revenue growth expectations. You said early April is basically reflected in your Q2. I was just wondering if you could talk about the impact of the minimum wage and your ability to raise your prices, your bill rates as minimum wage goes up I know Florida is due to come up in May and that should be a pretty significant impact there. And also if you can explain to us kind of how you are going about putting through those price increases from a timing perspective? Thank you.

Thanks. Yes, there are some large minimum wage increases coming through, namely as you mentioned in Florida which is going from $5.15 to $6.15, a dollar increase. Our operations team jumped all over this the first of the year. The increase goes through on May 6. So we've actually had time to prepare and with the strong demand down in Florida, it has given us the opportunity to get the bill-rate increases going through faster down in Florida. There is no doubt that the 4.4% that we experienced in Q1, was partially driven by Florida. Not only is their volume demand high down there, they've been getting strong bill rate increases out of Florida, so rough guess would be about a point of that 4.4 is driven by minimum wage increases.

Great. Thank you.

Okay. Thank you.

Your next question comes from, Craig Peckham with Jefferies.

Hi good morning Steve, morning Joe.

Good morning Craig.

Joe, I wondered if you could walk us through a bit - help us understand your due diligence process as you look at acquisitions. I mean clearly your - there's capital here - I am not totally sure what you can see in terms of availability or quality of potential deals and while you talking about that I am curious what you mean by specialty niches in on demand staffing.

Sure. Let me give you the -- the overview where we start before we look at any numbers. While we are looking at a company, the first we have three criteria that they have to pass before we even began to the analytics on it. One, they have to share a value system that is somewhere to our own. We don't want acquire a company that their values are different then ours. That means lesser so as opposed to higher. I think we have a high value system we are running our company on based on a values, strong value base and we don't want to acquire anybody who doesn't share that view.

Second, we want a management team that's independent of the owner. I really don't want the owner hanging around because, you know, the honeymoon goes over and you don't need people second guessing you all time, so they have to be a management team that's independent of the owner and that requires a certain sized company which works for us as well. And three, we are not looking at any broken companies. We are not fix sick guys. We're operators and I think, you know, we -- we want a company that's profitable right out of the - the gate and will be accretive, for our shareholders right of the gate. So all of that happens before we start looking at numbers and then the numbers, of course, I don't need to explain that you. You are a numbers guy, so.

As far as the niches, we are still looking in that one notch up that we've often talked about. That semi-skilled level and a good examples is the Spartan division who met all of those criteria that I just outlined to you plus they were -- it's a well run company and it's one notch up. And most importantly, working with customers who are similar to our own and that being small medium sized companies. We are not interested in getting into light industrial staffing for the Fortune 500 or Fortune 1000. There's a lot of players and Labor Ready's customers are the small, medium sized operators and when they go to a foreman for manual labor. They can also go to that foreman possibly for machine operators. So there is an overlap there where we can refer business back and forth between our staffing light industrial, semi-skilled and our day labor.

I also see an opportunity to also refer workers. We have 800 - over 830 recruiting centers out there and if we can identify some of the individuals who through government programs or maybe already has a skill that where they could be an apprentice, we can refer into our staffing division. That excites me because in staffing, you know, it's finding the right people, you know, we have 600,000 going through. So, any percentage of 600,000 is a lot of people. And, that also fulfils our vision, which is serving our temporary employees and our customers. We'll become dominant in the field of on-demand staffing. So, I hope that answers your question.

I was curious -- also Joe about what you see in terms of availability of firms that meet those criteria, and what kind of evaluations those potential sellers are thinking about?

Yes, no problem, I will let Steve answer that, he has been doing a lot of research in that area so, and he seems, he's been studying the population.

It is very interesting, Craig. There'ss quite a few people interested in selling at, we believe at the wrong price right now. I think they are a little overconfident on -- you know, maybe they went through a couple sour years and they want to sell on increasing demands, we will not pay on future dreams. So, we are pretty good at locking down what the current run rate is. We are at strong on saying we'll give you credit for current run rate but we are not going to give you credit for your projections for the year. We're not going to give you credit for your budgets. So, there is a little bit of a reconciling process going on here with sellers right now. Seeing the strong demand coming out of 2004 and a lot of these smaller businesses running growth rates of 20%, and wanting to be paid for that over the next 12 or 24 months, and we are not going there.

So, that is what slows the process down. I think that there is quite a few available, that meet this criteria that Joe laid out. There is enough, that we can have these good conversations that meet these value systems, meet this strong management team criteria and that aren't broke and are producing good profits, that are in the dimensions that we want to operate in. So, I think those companies are available there. It is just bringing reality to the drought period, now the quick run up, and the dreams that exist and Labor Ready having a very prudent management team here that is not going to make mistake. We have got a great core business going and we see no reason to mess up our core strategies with overpaying for business.

Okay good, and just the last question here. You know, obviously we have seen as the quarter progressed some softening in terms of the same store, growth rate. We saw a similar kind of softening in the late summer of 2004. I'm curious if you could maybe compare and contrast the two environments here and let us know what the distinctions might be?

Yes, there are some similarities. Number one, that -- it is a slight slowdown not large. It happened after a strong spurt of growth. It also happened in the period of time where we were very serious about keeping our gross margina high. We want to run the core business that we're good at and that's on-demand staffing, which is putting two workers out for two days in an on demand situation and being paid for that service. And we've been adamant on -- I'm not going to use the word clean up, but staying strong to that mission. And during the recession there is no doubt that as productivity levels fell, there were many workers available and that we might have gone downion our gross margins. We might have been even serving customers at the 15% rate margins instead of 30%.

Now, what happens is things heat up a little bit, other staffing companies step in and you take a 15% margin account and it starts getting bid and all of a sudden it turns into a 12% margin account and it gets bid again into a 10% or 8% margin account and we have plenty of other demands that we need to go straight off (ph). And so we say we are marching forward, we are going to get back into our core business. It's not a big piece of our business, I'm talking about here, Craig, but it's a similarity with what was going on last summer.

Now I can't quantify it, because it is not like one large account. I can't say that I know I had this 1% of my revenue that we did this to. It's a general feeling that the general conservation we're having in our business about keeping our core business pure and that's on demand staffing where our workers are ready to go to work on a daily basis and we need 30 - 35% margins to make that happen blended with a little bit of what is still manual labor jobs that the worker are going out for the week and that might bring 25% margins. But we want to stay in that period, or in that grouping where they are averaging 30 and so it's a long answer, but it's cleaning up a little bit of staying in your core business, not chasing low-margin work.

So in summary, it's not always - it's average bill-rate going up is not always about the incremental bill rate being higher 4%. It might be the lowest bill rate comes up and that's bringing your average up. So it's a combination of the two. We aren't concerned about this soft spot, this little bit of where we're at. It, it's being driven by so many factors, not one of them accounts for a very big piece of it and that's a very much similarity what we saw in August.

Thank you.

Thank you, Craig.

Your next question comes from Jeffrey Silber of Harris Nesbitt.

Thank you and my congratulations as well. Can you get us what the wage rate inflation was in the quarter?

Yes. It was 3.3%.

Okay. And is it safe to assume that, that might accelerate a little bit as the minimum wage increase goes into effect in Florida this quarter?

Well, the interesting part there is as we drove the bill rate up in Florida we were also that, that pay rate has also been following. We weren't waiting until exactly May 6 to do that. The reason being is it's not a hidden fact that there is a worker supply issue in the State of Florida and so taking the opportunity to drive the bill data up and the wage rate at the same time has given us an ample supply of workers. So that might just continue but I don't think there is going to be a huge spike because those wage rates in Florida have already come up a little bit.

Okay. That's helpful. In prior quarters, you have given us some sort of gauge about, I guess, a capacity utilization number. Can you give us a rough estimate of where is now?

Yes. That's such a general estimates that it really hasn't changed a lot, Jeff. That said, what Jeff is speaking to there is the reason our core strategy is so focused on increasing productivity, is we believe that throughput of each of our branches could be running in the $2.4-$2.5 million range and so with average annual revenue being around $1.3 million we're barely breaking the 50% rate. So we haven't made huge strides on that. We don't believe that that capacity is going to get filled in one year, Jeff. That's why this is a good long term strategy of continued leverage and we often speak that this isn't just a one year game here. This is Labor Ready's business. We believe we can push this leverage story for years to come.

Okay. Great. That makes sense and it's helpful. Just a couple of housekeeping items, the income tax rate guidance, in looking at some notes from prior quarters, I believe the guidance was closer to 39.5% or 40%. Any reason it's come down?

Yes. That guidance has changed slightly a little bit, a year ago the worker opportunity tax credit weren't in place. So we were a little bit cautious on how that was going to be implemented and if it was ever going to get passed. At the end of the year when that got passed and we knew for sure that those tax credits were passed, the tax rate actually came down a little bit but at the same time there were some state adjustments that caused the rate to go back up a little bit last year and we don't think that's going to repeat. So there was a little bit of a mixed bag a year ago. We're really comfortable with the 38% going forward.

All right. When you say going forward I know you are not giving guidance for '06, but would it be safe for us to use that in our models?

We don't see any difference right now.

Okay, great. Then one other question. The interest and expense line item went from an expense to income - I believe that was because of the novation. Is that something we should expect to continue, going forward?

Yes, that's right Jeff. In the fourth quarter we novated some our insurance reserves from Kemper over to AIG, and that changed the collateral nature of those programs. We had letters of credit outstanding against Kemper, which we paid about a 1% fee for that $40 million that was outstanding. We moved over to AIG about $50 million of cash, of which they pay us close to 4% on. So, it's a long-term deal wherewhat we think it's going to continue.

Okay, great. Thanks again.

Okay.

Your next question comes from Jim Janesky with Ryan Beck and Company.

Yes. And, a little bit of a follow-up on the slight slowdown. And, also on the flipside, where are you seeing particular geographic areas of either strength or more of a slowdown. I mean, for example, has the hurricane buildup in Florida continued at a pretty strong pace?

You know, Jim, the hurricane impact was for a such a short period of time that - the quick clean up work. But, what it is doing to us is, it's creating a lot of long-term demand in the State of Florida. So, there's long-term construction projects that are going forward down there that our operators are estimating there might be three years worth of backlog back here. So, its not clean-up work but it's long-term projects. So, that's going to be nice long-term consistent demand out of State of Florida.

As far as other impacts that we're seeing in this March softening compared to February - you know, there's nothing that concerns us. It's broad enough and it seems similar to August that nothing has jumped out that there's evidence, you know, there's nothing there that we're concerned about.

Okay. How about any of your customers worried about rate increases, interest rate increases hurting the construction market, or, do you think its too early to tell?

We've got 325,000 customers, Jim.

Okay. So, you are not really hearing that from across the board or anything?

I think, if you look back, you know, I've been here like eight years, and I've seen interest rates go up; I've seen them come down; and, and the mix might change between commercial and residential. There's always been about a third of our business. Our operators go where the business is, and if it's construction they go there and if it's transportation they will go there. Remember, we're putting to work a manual labor person not someone that can only work in a certain industry.

Sure. And then a little, if we can get a little bit more color on the UK market, are the growth prospects that you originally expected still there? You said, I think, you planned to open one more office there this year, is that correct, Joe?

Yes. So open four, they're performing to budget right now, which is what our expectations were And we still see additional markets that we can go into.

Okay. And finally, on worker's compensation, Steve, I know that you've done a - a focus I would say in California on trying to bring the levels down there and have done a pretty solid job there. Are you rolling that out to other geographies and therefore could be even more upside going forward in the worker's comp program?

That's a great question, Jim . When we start exploring back in '02, what we could do differently in California and we came up with some concrete things to put in place in '03. We threw a lot of things, a lot of programs in that direction. And there's two in particular that really stand out strong to us. Actually, there's three but two, in particular, standout strong that we're going to rollout. And those two have to do with better screening of candidates, workers making sure that we know their risk factors better and better screening of customers that we know their risk factors better.

That seems simple. However, it's very important to stay focused on that. So we put a couple tools in place that help us screen the workers and screen the customers. In addition to that, then we put some safety specialists on the ground that -- can go to the customer side, review what we expect and help the branches follow up on safety concerns. And so those programs we definitely are going to roll forward. And we're looking at additional markets to take them to as we speak.

Okay. Great. Thanks very much.

Okay. Thanks Jim.

Your next question comes from Mark Marcon with Robert W Baird.

Let me add my congratulations. Terrific quarter.

Thanks Mark.

I'm just wondering, could you elaborate a little bit more with regards to the trends in the Spartan branches that you had opened for awhile, are they kind of following the same sort of trends as the overall organization or is there any differences that you can tell at this point?

Well, Spartan has its own trends, they don't compare to the day labor side.

Right. And that's why I was wondering is what are trends are you seeing?

Well. They're performing to budget as well as expected. And the new branches just some online and some of them are few weeks old so.

Sure.

We have a good crew down there and they are opening in markets that we've got a good demand and working with Labor Ready in markets where they haven't been before and referring customers.

The branches that you acquired that were open a year ago are they -- up as much as that the overall organization or any differences?

When you say overall organization, maybe that's what I am not understanding Mark

If we take a look at your, you know, internal growth rate or same branch revenue growth rate of 10.5% for the quarter. Would the Spartan branches that were in existence a year ago, are they up around that level too?

Yes, the Spartan brand itself is up that far. Now keep in mind we bought two brands -- and so Joe's specifically answering the question with the Spartan name because there is another brand name and we bought out, Workforce...

Sure.

...that is in the day labor business. We've been making a few modification to that business that has changed up the results slightly. So when I say modification it is so close to our own day labor business that we are putting common systems, common processes and things in place, which has result in a little bit of a change-up, but that's all expected. So when Joe speaks to the performance is as expected we are not concerned whether the growth rates mirror the company as a whole is so immaterial, it really doesn't matter but we're very pleased with that acquisition.

I was just trying to get a sense for -- are you seeing, you know, double digits or low double digits year-over-year growth on this part.

In all material respects, it's mirroring the company's overall.

Okay, great. And then the 4.4% bill rate increase that you experienced during the - during this quarter. Would you expect that same sort of, you know, if you project out to the -- to the second through the fourth quarters of this year would you generally expect that prices throughout the reminder of the year will be up somewhere around 4%?

But that matches pretty close to the fourth quarter of a year ago. So we -- I think by the time we get to fourth quarter it will subside slightly. And actually, where it really started picking up was when we talked to the point where we had terminated some relationships with some of the low margin work in August. So yes, we believe that is going to be in the 4% range in Q2 but as we get to Q3 and Q4, especially when you look at the overall margin, that's where our margins came up and they were at the rate that we wanted them at in Q3 and Q4.

Right.

I think that wage inflation that average bill rate will subside slightly in Q3 and Q4.

What would you think it'll be by time we have Q4 Steve?

Well, we like to think it's going to be in this 2% range or so, but it might an impact of about 2 of the carryover of what we did in Q3 and Q4 that's still carrying into Q1 and Q2.

Got it. Right. And then you mentioned Florida and I imagine in some places may be a little bit, you are able to raise the bill rates, because workers are becoming a little bit scarcer. I was wondering if you could talk a little bit to the supply side of the equation in terms of in areas where labor markets might be tightening. What are some of the things, the programs that you got in place in order to get the folks into your units?

Yes. In Florida and any other state where they're experiencing any kind of pressure on supply which could be spot, spot points in the year in certain markets like Southern California in the summer for example. We gave them a budget for advertising and they are to use that budget for recruiting workers or recruiting customers and that's a branch by branch decision and they have the tools in place to that and bring in those workers that they need. If you take the organization as a whole, we are still dealing with some more workers, workers left behind so to speak, but in a spot market or sometimes in Florida with the hurricane work, they are actively recruiting. And if they have programs we give them on how to do that.

So, I mean that's not a - that's not a big concern, is it Joe?

No.

Okay.

It's a shift, you know. Looking for customers or looking for workers so.

Okay. Great. Thank you very much.

You bet.. Thanks.

Your next question comes Jim Margard with Rainier Investment Management.

Hi. My questions have pretty much been answered, I was just focusing in on your ability and worker's comp to apparently achieve some pretty consistent results on that. Where that looks like it's more of a - almost a pro -- I wouldn't go so far as to say a programmable or a predictable result, but it appears the disparity from quarter-to-quarter, looks like it's - you've got it pretty well, pretty well tapped but my, I think that was the area of my question and I think you pretty well covered that. Thank you.

Yes. I like the trend too, which is down, so. Thanks.

Your next question comes from Sean Nicholson (ph) with Kennedy Capital.

Yes. Can you speak to..

Hi Sean.

How are you?

Good.

You guys are growing, you know, expanding relatively on a good pace. What's the amount of capital that goes into just a single location and then how long does it take before that recovers its cost?

So, you are talking about the Labor Ready brand. The cost is about 45,000 to open a branch.

Okay.

15,000 is the cash machine. 15,000 in capital equipment, like computers and leasehold improvements, pretty minor, and 15,000 of training cost. So that's the entry cost. And if we're opening in markets, our area directors are instructed to open in markets where they can give us relatively strong assurance that they are going to breakeven in less than a year. And if you shift over to the Spartan brand, the costs are little higher in opening, breakeven time is more like 18 months, same thing in the UK. We open a branch in the UK that costs us slightly higher, just higher cost of doing real estate over there, benefits and -- it takes about 18 months in the UK.

Okay. Great. That's all I needed thanks.

Thanks.

Your next question comes from Michel Morin with Merrill Lynch.

Yes, thanks just a quick follow up on the use of cash, obviously the cash is a - you're generating quite a bit of cash and it looks like by the end of the second quarter the convert will be behind you. Can you update us on your thinking about potentially initiating a dividend in the near future thank you.

So you are probably not surprised that that's not the first time I''ve ever gotten that question. We have the cash. I am pleased to see that our -- when we went out and do the offering on the convert, the intention was it would convert, thanks to the performance of our team here, we won't be doing that.. So, the first application of cash will be to our strategies. We are not going to be an acquisitive company but we are going to be selective in an acquisition that adds to our business as Steve described before. So that's our first application is we'll apply it to our strategies. Second application then would be if we have excess cash and there's a point in which we are not putting it into the business then we'll consider a dividend and/or a share repurchase. That discussion is a board discussion that we'll probably have both in May and September.

Okay. Great. Thank you.

Thanks.

Your next question comes from Evan Marwell with Criterion.

Good morning guys.

Hi, Evan.

Question, as the wage rates go up on the minimum wage, are you guys generally able to maintain your gross margin above those wage rates or do you expect to see some compression in that?

No, Evan, we have a pretty good history of passing minimum wage increases through and maintaining our margin.

So, in some ways it is actually a good thing for you then.

Yes, in some ways, you know, we don't go out politicking for minimum wage increases, because there is always that trade-off between how does it affect business but-- we passed it through, Evan, because we don't have contracts with our customers. All of our work is pretty short-- most of our customers don't have that and we will finish a project before we raised it, but our projects are two, three days long, and so with that ability to put it into the system and pass it through and you go to a customer and say, hey we've got to increase your bill rate, you know the minimum wage went up. They understand that because they are dealing with workers at that wage as well.

Great. So, as you look forward over the next, sort of 12 to 24 months, what do you expect to be the overall impact of these minimum wage increases on your wage, the wages that you have to pay out?

Well, we know the ones that we have currently.

I think, we are there Evan because we -- Florida was the last one to come into play on May 6th, and as I mentioned earlier we have been running most of that through and building up for the opportunity, and most of the minimum wage increases come through on January 1.

Okay, great.

Six states that had minimum wage increases and then so the next time we'll know about other states would be probably January 1.

Okay, great thanks very much.

You bet.

(Operator instructions) You have a follow-up first question from Mike Carney with Stephens, Inc.

One more...

Yes, Mike

You closed about 30 branches in the last year. Obviously that has taken away some revenue, is it -- am I right in assuming that those branches, a particular branch needs to be unprofitable at its level to be closed or are there other factors in closing those branches?

The, I'll just give you the process we use here. The process we have here, Mike, is that all my regional Vice Presidents have a portfolio of branches and before they close a branch though -- what happens is we have what is called a watch list, which is a pretty short list now. But nevertheless, if a branch is a year or more in age and losing money they are on a watch list, and the district manager needs to submit to the ADO and the RBP a business plan to correct that. We will try moving it to a different location, we will try a different manager, if we have to. But if in the long run, it appears that that's just not going to gain traction and get to the levels we expect, then we'll close it. So, that's a process that just is ongoing in managing the portfolio of offices.

And, can you speak to a maybe in the last year, how many of those were in the UK versus your Labor Ready branches in the US?

I'm missing that Steve, I'm sure we have that count here. I think, fairly minor.

I think it was 3, Mike.

Okay. So, the majority is from the US?

Yes.

Yes.

Would those be older branches or newer branches that just didn't make it, and you went through and they didn't make it, or, would any of them be branches that have been around a long time that you just never closed?

Well, we do give these things 18 months. We are hoping - we've got a great process before we open these. It's a very strict process we go through before we decide we are going to put a branch location there. So, we give it plenty of time, because we don't want to give up on the demographics that said it was going to be a great branch to begin with. So, I don't think you are going to see that any of them are under 18 months old. Now, there are a few, not a bunch, but there's a few where we just lose our leases along the way. So, things change, conditions change in a community, and traffic patterns change or landlords decide to do something with their real estate. But, that's a small amount of those closures.

Okay, thanks.

You bet.

Our next question comes from Cindy Reuben (ph) with JMP Securities.

Good morning. I was just wondering if you could comment on whether or not you've seen any meaningful business segment picking up other than construction?

I think Steve answered that earlier that we have been seeing is pretty much across the board.

Okay, thank you.

There are no further questions at this time. Mr. Sambataro, are there any closing remarks?

No. I think, I just want to thank everyone for their interest in Labor Ready, and, if you have any additional questions, feel free to call Steve or I. Thank you very much.

This concludes today's Labor Ready 2005 First Quarter Earnings Conference Call. You may now disconnect.