TrueBlue Inc (TBI) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Labor Ready 2005 second 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 second quarter earnings results which were announced yesterday. If you have not received a copy of this announcement, please contact Lisa [Ritrel] at 1-800-610-8920, extension 8206, and a copy will be faxed to you. At this time, I would like to hand the call over to Ms. Stacey Burk for the reading of the Safe Harbor. Please go ahead, Ms. Burk

Here with you today from Labor Ready is Joe Sambataro, President and Chief Executive Officer, and Steve Cooper, Chief Financial Officer. They will be discussing Labor Ready's 2005 second 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 filings with the Securities and Exchange Commission, including our most recent Forms 10Q and 10K. I'll now turn the call over to Joe Sambataro.

Thank you, Stacey. Good morning, everyone. I am very pleased with the results we announced yesterday, revenue of $295 million compared to revenue of $267 million for the second quarter of 2004. Net income for the quarter was $15.4 million, or $0.30 per share. This compared to $10.1 million, or $0.21 per share, for the second quarter of 2004. I am proud of our ability to continue to deliver double-digit net income growth, with a record 52% net income growth over the same quarter last year.

Our team at Labor Ready continues to drive revenue while controlling costs and improving margins. More business over the same calendars provides the financial leverage on our bottom line from our top line growth.

Another positive element for our shareholders’ value is that we have continued to pursue our strategy of diversification of services through strategic acquisitions. In May, we announced the acquisition of CLP Resources, a leading skilled trades staffing company. We negotiated with the owners of CLP Resources for nearly a year, with due diligence taking nearly 4 months. Our approach with CLP Resources was similar to our approach with Spartan Staffing.

As I have mentioned on earlier call, we will not be an acquisitive company. What I mean by that is we will not purchase a bunch of companies and hope they all work out. Instead, we look for three attributes before we even discuss price. First, they must share our values. Second, they must have a strong management team, excluding the owner. And third, they must be profitable. We do not want broken companies. CLP and Spartan met all of these criteria, as well as being accretive on day one.

CLP Resources now operates 53 offices in 21 states. The company is a wholly owned subsidiary of Labor Ready. They will continue to operate as CLP Resources, keep their name, and keep the management team in place that has built the existing business and has the ability to grow the business nationwide. CLP Resources represents a strategic market for Labor Ready in a related vertical, or what I call one notch up. Construction related business represents about a third of our day labor business. Our network of Labor Ready offices in every state in three countries will enable CLP Resources to expand their sales and existing offices, as well as open and ramp up in new markets more quickly. We are particularly excited about expanding CLP Resources into Florida and Texas, the second and third largest markets for Labor Ready. Our on-demand labor is the cornerstone of our business. That's what has brought us our success in the past and success with our customers. These same customers will now be served with additional offerings to meet their staffing needs.

Our diversification strategy is designed to build on the base of business that we have built over the years. We have now brought in our corporate identity to include other brands, including Spartan Staffing, Workforce and CLP Resources. While they operate as independent units, the intent is for these units to collaborate with each other to create value for the customer.

It is important to note that Spartan Staffing, which serves the light industrial industry, and CLP Resources, is a different model than Labor Ready and Workforce. Labor Ready and Workforce, or on-demand, labor is a sales model, managing the labor and administrative burdens of temporary, on-demand staffing. CLP Resources and Spartan Staffing is more of a recruiting model, in which those businesses look to hire and retain as many contracting specialists as possible. So we operate two different models, which is why we will not blend the companies. The brands will operate independently so that they can complement each other, and we can sell the services of both to the common customer base.

We also wanted to point out our solid balance sheet, which puts us in an excellent position to continue to pursue our growth strategies. On June 20, 2005, Labor Ready completed the redemption of all its outstanding convertible subordinated notes and issued approximately 9.6 million additional shares of common stock, increasing the total shares outstanding to approximately 52.5 million. The notes have been accounted for on an as-if converted basis, and as a result, the issuance of the shares was not diluted to net income per share for the quarter.

A great part of the reason for our success is the integrity, discipline, and spirit of our operators and support teams. Each day, they allow small and mid-sized businesses to optimize their personnel, increase their work force, and meet volume demands. I believe that a company differentiates itself through its values and the people who live those values every day. I cannot be more proud of this team and the customer-focused business model they drive, and would like to take this opportunity to publicly thank our employees for their commitment to Labor Ready, its customers and its shareholders.

I also believe that the quarter's healthy performance was made possible by our key business strategies, to grow current branch revenues and profits, to expand in smaller markets in the US and Canada and in the UK, and to penetrate new and existing markets with additional brands and a diversification of services. We are also always mindful of continuing the improvements and productivity and cost control measures implemented in recent years.

On a final note, I would like to mention our recent partnership with the Army National Guard. Labor Ready is providing opportunities for National Guard members and their families to find work. There is also an opportunity for National Guard recruiters to talk to our temporary employees about opportunities the National Guard can present to them. We had a kick-off last month, and the partnership has been well received by our temporary employees, as well as by National Guard members. I could see more skilled workers coming in to our branches as a result of that partnership.

In conclusion, we have the strategies, the financial strength, the business model, and at every level, the team to continue to deliver strong results. We will maintain our disciplined approach when executing our strategies and maintaining sound financial controls.

With that, I'll turn the call over to Executive Vice President and Chief Financial Officer, Steve Cooper, for the financial review.

Good morning. Joe has just updated us on several exciting initiatives that are driving our business performance. I will now walk through some of the metrics of those initiatives and describe the impact they had on the second quarter that just ended and the impact we see them having going into the third quarter.

As previously noted, revenue for the second quarter increased 10.5%, as compared to the second quarter of 2004. The increase in revenue during the quarter came from the following components. One, branches opened one year or longer increased 6.2%. Two, new branches open less than one year, excluding the acquired branches, contributed 80 basis points of our revenue growth. Three, branches closed during the past 12 months accounted for a loss of 1.6% of revenue. Four, the CLP Resources operations that we acquired on May 27, 2005 contributed 5% growth in our revenue. Then five other small items like currency fluctuation has accounted for the remaining difference of 10 basis points.

I want to point out that our monthly trends that make up the same branch revenue growth of 6.2% for the quarter. April grew at 7.5%, which was in line with March's growth of 7.1% that we reported on our last earnings call in April. May fell off from April and came in at 4.3%, and June bounced back, as we had suspected it would, and it came in at 6.7%. Now to some, those differences are big. However, to us, we're excited to see our operations perform as we'd expected, given the economic conditions that we saw at the end of the first quarter. We continue to see improving trends since the end of June, and we're expecting the same-branchrevenues to grow approximately 7% in the third quarter.

Geographically, our best results were on both the east and west coasts. Most of the areas on each of those coasts had continued outstanding performance, with double-digit sales growth throughout the quarter. The middle of the US, states from Texas extending up through Illinois and Michigan, experienced more sluggish results during the quarter. I'm pleased to point out that over the last 8 weeks, each of these states has had improving trends, and we feel it was definitely just a soft spot in the economy during late April into May, mainly in the manufacturing industry.

Our international areas had mixed results. Canada's performance was very strong, with revenue growing in excess of 15% for the quarter, which is primarily same-branch revenue and the UK declined by 4% in Q2. Again, we are pleased, though the UK's trends over the past few weeks, as they had shown, continually improved each week since the first of June, which confirms too it was just a soft spot in manufacturing.

As mentioned, we acquired the operations of CLP Resources on May 27th and had 5 weeks of results in our second quarter. These 50 branches contributed 5% to our growth, with $12.6 million of revenue for those 5 weeks. That is approximately 20% year-over-year growth for CLP Resources during the month of June, which matched the trend they were experiencing during the first quarter of 2005, before we acquired them. Construction growth continues to have a solid outlook here in the US, which is helping drive CLP Resources' great results, and our Labor Ready branches’ results for construction remains the strongest.

Today we provided guidance for the second quarter that revenue is expected to be $350 to $355 million. That would be about 19% growth over the third quarter of 2004. Approximately 13% of that is expected to come from the acquisition of CLP Resources, while the remaining 6% will come from our organic growth. The 6% organic growth is expected to be made up of 7% same-branch revenue, along with loft revenue of 1% related to the net closures and new openings over the past 12 months.

For the year as a whole, the 2005 revenue growth is expected to be approximately 16%. Half of this growth, or 8%, is expected to come from CLP Resources. Approximately 1.5% is from the impact on the first quarter revenue of the Spartan Branches, as they were purchased at the onset of the second quarter in 2004, and the other 6 to 7% is to come from same-branch growth. When we started 2005, we had anticipated 7 to 8% organic growth. With the adjustments due to economic conditions in the second quarter, we are pleased to be close to our original estimate at 7% growth in same-branch revenue for 2005 as a whole.

Our gross profit, as a percentage of revenue in the second quarter, was 31.4%, up from 29.9% in Q2 a year ago. That is a 150 basis point improvement in gross margin percentage. Approximately 60 basis points of that improvement has come from bill rate growth exceeding pay rate growth. We had a 3.4% growth in the average bill rate mix in our core business outside of the acquired revenue at CLP, compared to Q2 of 2004, and a 2.8% growth in comparable average pay rate mix during that same time.

In addition to the average bill rate improvement having a positive impact during the quarter, we again experienced adjustments to our workers' compensation reserves that were established prior to the beginning of 2005. In the second quarter, that amounted to 60 basis points of revenue. These prior work comp reserve adjustments, along with our current period workers' compensation costs for 2005, are running about 50 basis points lower than prior year, amounts to approximately 100 basis points of improvement to gross margin in the second quarter related to workers' compensation.

This is also true for the year-to-date gross margins related to work comp. The prior year work comp reserves had been lowered by our actuaries in both of the first two quarters, which has brought the workers' compensation costs in at about 6.5% for 2005 so far. We continue to project the 2005 workers' compensation costs to be about 6.8 to 7.2% of revenue. The reductions in both prior year reserves and the ongoing workers' compensation costs are related to various prevention measures implemented in our operations that have reduced our accident rate by over 10% as compared to the beginning of 2004.

Although we are comfortable estimating the ongoing cost of work comp to be lower than prior year by about 50 to 70 basis points, we cannot predict that the prior year reserves will have any further adjustment, as that is a calculation run by our actuaries each quarter. Therefore, we expect gross margins for the remaining two quarters of 2005 to approximate 30.7, down from our year-to-date gross margins of 31.4.

Selling and general administration costs for Q2 as a percentage of revenue were 22.4%, as compared to 22.6% a year earlier. We picked up 20 basis points of leverage, as compared to prior year second quarter, by improving the productivity of each branch location. Average 12 -- [trading] 12 month revenue per branch increased to $1,325,000 as compared to $1,223,000 in Q2 of '04, about a 9% increase. This improvement is exciting to us, as it includes the averaging in the new locations 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 additional 30 new locations net of the closings we have had since Q2 of last year, along with the variable SG&A related to the additional same-branch revenue growth, and the cost of running the CLP Resources operations. By controlling operating costs while revenues are continuing to show improvement, we are still expecting to show the leverage we have available in our business model by the reducing the annual SG&A percentage of revenue by approximately 80 basis points in 2005 as compared to 2004. We'd originally expected 100 basis point reduction, so we're pleased with the current projection of 80 basis points, taking into account the results of Q2 and the CLP Resources acquisition.

Average [trading] 12 month sales per employee has increased to $377,000 in Q2, up from $358,000 a year ago. The driving forces of more sales per branch and more sales per employee are producing a stronger growth rate in net income as compared to sales growth. We believe that trend will hold strong, as that is the leverage we will continue to get in our business model as we continue to focus on our key strategy of improving the productivity of each branch and each employee.

By leveraging our operating costs with increased revenue, we have improved net income margin to 5.2% of revenue for the second quarter of 2005, compared to 3.8 a year ago, and on a [trading] four quarter basis, we have produced net income margins of over 4.5%, which is up from the 3.5% we recorded for 2004 as a whole, and 2% for 2003 as a whole. We're really pleased with the continued improvement in operating leverage.

Our income tax rate in Q2 was 38.1%, and improvement over Q2 a year ago of 40%, due to the worker opportunity tax credits being in place this year, and they were not in place until Q4 in 2004. Our income tax estimate for 2005 continues to be approximately 38%.

We have provided guidance for net income per share to be $0.37 to $0.39 for the third quarter, and $1.09 to $1.14 for the year. This would be a growth in net income of over 50% on the revenue improvement of approximately 16% for 2005 as a whole.

I want to speak to the leverage ratio for just a minute. We often state that we can grow our net income at a ratio of 4% for every 1% of same-branchrevenue growth, so bear with me while I attempt to reconcile the 4 to 1 ratio expectation with our real growth for our expected 2005 net income. Including the normal leverage ratio I will describe, there are five categories driving the net income growth. First, with 2005 same-branch revenue expected to be approximately 7%, we would expect that to drive income growth by about 28%, or 4 to 1.

Second, in addition to this leverage, we have spoken about our prior year work comp reserve reductions through the second quarter. That will account for about 6% of our expected net income growth. Third, we have had additional growth margin improvement beyond the prior year reserve adjustment. That is expected to provide about 10% of our net income growth.

Fourth, the CLP Resources acquisition is expected to provide approximately 6% of our net income growth. And fifth, the conversion of our convertible notes will reduce interest expense for the second half of the year by $2.2 million pre-tax, and this will impact net income growth by about 4%. You can see that our normal leverage of 4 to 1 is holding. Along with some other great events that we have worked hard to make happen, we expect this to produce over a 50% improvement in net income, as compared to 2004.

The balance sheet continues to be strong, with approximately $119 million in cash, marketable securities, and equivalents. That is after our all-cash acquisition of CLP Resources for approximately $46 million at the end of May. We are excited about the potential opportunities we have to invest some of our available cash on hand into operations through acquisitions and lines of business that are similar to our niche, like we have with Spartan Staffing in 2004 and now CLP Resources in 2005.

We are confident in our ability to continue to serve small and medium businesses with specialty niches in on-demand staffing, especially those niches closely related to manual labor in the light industrial and construction industries. We believe there will be opportunities to continue adding shareholder value with our available cash by expanding our reach to the staffing needs of small businesses.

We have also stated that in light of our future opportunities we seek to continue to expand, and to look at the viability of continued share repurchases or dividend payments to balance them out of necessary cash on hand to run our day-to-day operations.

We appreciate this opportunity we've had to update you on our progress, and at this time, we'll open up the call for any questions you may have.

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

Good morning. Just wanted to clarify on the CLP acquisition, I'm assuming that most of the $46 million has already been paid. Are there still any payments that need to be made there? And then secondly, related to that, we saw a jump in the AR, and I was wondering if the CLP acquisition is something that will be changing the AR days sales outstanding at all. Thank you.

Yes, we have paid that $46 million, and there is about 15% of that sitting in a trust that is off our balance sheet in an escrow, so the full balance has been paid on that, Michel. As far as the AR jump this quarter, that really has to do with -- we purchased the balance sheet of CLP Resources. We actually bought the stock, so the balance sheet came with it, so we brought in a full load of AR, but there's only one month of sales related to that because some of the receivables are related to sales prior to when we purchased them, so we're collecting that. So once we get out 3 months of operations in there, then they'll be normalized. We're not expecting that CLP will significantly change our fee of outstanding and sales in the receivables.

Great. And just as a second question, I think towards the end of your comments, you said something about the buying back re-dividend. Did I understand correctly that it's just something that you're still looking at, but there's no real change in terms of what your conclusion is at this point. There's no buy back approval or any further discussion on the dividends?

I think there's still some shares authorized by the Board for share repurchase, but we haven't made any in the recent months. As far as dividends, that's still under discussion.

How much is authorized for repurchase?

About 1 million, Michel.

Great. Thank you.

The next question comes from Craig Peckham with Jeffries & Company.

Hi, Steve, and hi, Joe. I guess I wanted to see if you could elaborate a bit on any kind of pricing dynamics that you may have seen during the quarter, particularly given that the month of May was one where you had a temporary slowdown. And if you could maybe give a little bit of commentary about pricing trends and competitive dynamics by region, that would also be helpful. Thanks.

Yes, not too different Craig, pretty consistent. We're pleased that we're able to raise our bill rates higher than any wage inflation, as Steve pointed out, but I wouldn't say there has any been significant changes in that category for the Company or by area.

And, as it relates to kind of the back half of this year -- I apologize, I may have missed it during the prepared comments -- but how much of the same-branchrevenue growth in the back half of the year may come from expected bill rate increases?

Oh, I would think it's going to be about 3%.

Okay. So that's not any different than what we've seen over past quarters on a more normalized basis then?

No, we always shoot for our margin targets, and in some cases, we've been exceeding it, the 30%. At times, we have -- once in a while, a competitor will come in and go buy the business, and we just won't go there, and they specifically, those customers end up coming back to us because of the better service. But as far as trends in pricing going forward, we see a good marketplace, but we're not looking to change our bill rates in any significant way, so what you see in the last 6 months will probably be a good indicator for the next 6 months.

Okay. My last question, can you give us a sketch for how much of the current revenue run rate is coming from residential construction as distinct from commercial construction, of course with the inclusion of CLP?

Yes, I don't know we have that breakdown in those kinds of specifics. As you know, about 30% of Labor Ready business is construction, and that's mixed between residential and commercial. Many times we're providing services to vendors who can install dry board in a commercial building or a residential. We don't always know where those workers are -- whether they’re on a commercial or a residential. That's not part of our SIP code breakdown, but it’s a pretty -- I would say it's definitely shared, that it’s not driven -- it's probably more largely driven by smaller commercial. CLP, too, has similar diversification between residential, commercial, and some types of tenant improvements and things of that sort.

So if your question is related to interest rates and if interest rates go up, is there a concern that we're going to see a significant impact, it's hard to say. I think what's happened in the past with Labor Ready is construction has always been a third, and you move between commercial or residential, depending on interest rates. So we've had that third of our business in construction and high interest rates and low interest rates. I've looked at CLP and their history, and they, too, move between those categories in different periods of time, depending on where the market's the strongest.

Okay. Thanks Joe.

You bet.

Your next question comes from Mike Carney at Stephens, Inc.

Hey, good morning. Congratulations on many quarters of growth.

Hey, thanks, Mike.

A couple questions. On the comp growth, Steve, you had mentioned 4% in May. Of course, that was lapping 20%, I think, from the prior year, which is quite extraordinary, and the entire second quarter was pretty strong last year, and then the third quarter was a lot weaker at about 7%. So, 7% to me seems somewhat conservative. I mean, would you agree with that for the third quarter?

Well, there's no doubt that the third quarter is easier than Q2 or Q4, so we know that we had a little bit of slowdown in July and August last year, so when we just look at our weekly run rates on a dollar basis on how things are going, we look at that over the last 8 weeks and then project over the next quarter and give you our best shot at it. So I think that's what we've put down here today.

Okay. And then also, Joe, you mentioned some of the growth strategy for CLP, trying to move into Florida and Texas, but can you give us any more detail on -- is this a possibility for some more substantial branch growth, given that there's only 50-plus branches right now, and will that happen this year or in '06 or when? And then also, are there any IT initiatives or something of that sort to aid in the marketing between CLP and Labor Ready and Spartan and Labor Ready?

Let me ask this of the first part. We see the potential for CLP to go nationwide. That may not mean 50 states. It's just parts of the Midwest like North Dakota, South Dakota, and it may not really make sense. We're going to go where the lowest hanging fruit is first, and that's going to be in Texas and Florida. They're in 20 states; they’re now in 21. We have started some branches in this category, what I call Plan B, which is we will go out our branches and we kept comparing a build versus buy strategy. So they now have two branches in Texas, and so we've begun our expansion there.

As far as looking at it, it's not a 1 year program to go nationwide; it's probably more like a 4 year program to go nationwide because while we have the cash to open the branches, as you know, we try to balance new openings with our financial earnings leverage, and so that's one aspect we always look at, that 5% of our base. So if we continue to open 5% of our base, we're going to put those offices in the highest and best return, and the competition’s going to be Spartan, CLP, small markets, UK. We're right now in the process of analyzing that for 2006.

The other constraint that, as you can imagine, is a CLP team can only open so many branches and still maintain the quality control, still maintain the earnings contribution that we expect from them going forward. And so we're going to meter the rate of openings, but we're going to go with low hanging fruit. Florida, I’m just -- I can't wait to get there with CLP. It's one of our strongest states. Out of our 300,000 customers, we've got 100,000 in construction nationwide, and Florida's been a great state for us, in all aspects, in all sectors. But if you've been to Florida, I know, Mike, you see construction everywhere, and so that's going to definitely be -- target openings in '06 will be in Florida.

And we've also asked CLP to look at pocket acquisitions, so if they see a company in a market, and that company meets those criteria, that they can pull those companies and manage it under CLP, and we would support that. So there's two ways in which CLP will grow, both by possible regional acquisitions, if they meet our criteria, and by organic growth. But I wouldn't say we'll be nationwide in 2006, but I could see that by 2010.

Okay. And then, what are the initiatives for leveraging the Labor Ready customer base, and to some extent, the candidate base with CLP and Spartan?

It's probably 10% IT and 90% people. Do you know what I mean? So first of all, let's say CLP, in an existing market or in a new market, obviously, we have a complete database of our customers in those markets, and the types of customers we have, particularly in the construction industry, and we'll be able to leverage those relationships. And that's where the people start to come in. Referring customers back and forth is something I know will happen, but it will take some time because there has to be trust and respect built. We've already started that with some meetings between CLP and Labor Ready in southern California, and that's a big market for us and a big market for them.

And we see a lot opportunities where, not only do customers require skilled workers that we don't have at Labor Ready, but some of our workers coming in to the branches might be able to qualify to work at CLP. So it's both; it's workers and customers. Then on the CLP side, they're not very much into the short-term day labor stuff; they're more into longer-term assignments, and that could be a cross referral back to Labor Ready. So we see adding a lot of value to our customers by being able to share, provide both services, both on the day labor, a half hour notice type thing, on-demand, as well as skilled craftsmen. Our ramp-up with CLP in these new markets, I expect, as a result of our being part of Labor Ready, will be more rapid than they otherwise would have been without the relationships.

Appreciate it.

You bet.

Our next question comes from Jeff Silber with Harris Nesbitt.

Just a quick follow-up on the last question. You typically don't open branches in the second half of the year, but you're going to add 5 new ones. Should we assume that those are all CLP branches?

A couple of those will be, Jeff, and the others are -- when you get in every market like we are, there's chances for openings year round -- not a lot. We're going to stick with, especially in the Labor Ready deal, it's best to be open by summer. However, we do have a few openings happening here the first part of July.

Okay, fair enough. In prior quarters, you've given us a rough number for capacity utilization, and I know it's more of an art than a science, but I was wondering if you can tell us, what are you running at in your Labor Ready branches, your Spartan branches, and your CLP branches?

Yes, you're right on that it's just a rough shot. We've had a look at the throughput of availability of the square footage of the office, how many workers can come up to the counter, how many can be dispatched in the morning, how many can be paid, and with our average branch volume getting really close to $1.3 million, when we look at this, we're looking at somewhere between, in today's dollars, $2.2 to $2.5 million in the Labor Ready office is a good size. So we're just approaching that, getting close to that 50%, maybe teetering over the top of it.

As far as CLP, their utilization looks very close to ours. They've got offices that -- their average branch size is about $2.2 million, and they've got offices that are doing $4 and $5 million very comfortably. So again, as far as fixed costs of running the branch, the rent and utilities, the communication costs, and the fixed nature of the salaries that run the branch, we definitely can leverage CLP also. There is a variable component related to bonuses that kicks in, but that's very small in relation to the fixed cost that exists there.

Now at Spartan, half those branches -- we have 18 them now, and half of them are brand new. So we have a long ways to go there. The existing 9, they're probably above 50%. Those were very mature branches. They weren't -- they didn’t have an aggressive opening schedule, so I would say their existing 9 were well above 50, maybe in the 75% level. But these brand new ones average it back down. So, in general, we'll just stick with our 50% utilization kind of thumb in the air type thing.

Okay, great. That's helpful. Now, I know last year towards the tail end of the year, the Company benefited from all the hurricanes down in Florida and in the south, and not that anybody's rooting for any more hurricanes, but had you quantified what the hurricane impact on your business was last year?

Most of that impact was in Florida, so by itself, Jeff, it wasn't significant, as we've mentioned before to the entire Company. When the hurricanes come through, we lose business because people are home, battening down the hatches, and then afterwards, we gain business, but it's limited to how many workers we can find. So, on a longer term, we've picked up a number of new customer relationships as a result of post-hurricane work, and we saw that as a benefit longer term. And it's difficult to quantify that, though.

Even today, there's still reconstruction going on in Florida for the hurricane, before the next batch comes through this summer. So, to put a percentage on it or a dollar amount would be rather difficult because it was more longer-term relationships. I think in the long run, it's a net gain, but I often have said don't buy Labor Ready based on the hurricane (inaudible), and don't sell, if we have fewer hurricanes. It's not significant enough to do it that way.

All right. And I'm going to keep on the disaster theme. If we can shift over to the UK, with the terrorist bombings from a couple weeks ago. I don't know how much business you do in the city proper as opposed to outside London, but have you seen any impact on your business accordingly?

No, no, very little. I mean, distraction if anything, probably more on the negative side, not the positive.

Okay, great. And just one quick follow-up. Somebody earlier asked the question about DSOs and I realized it was an impact because of the timing of the acquisition, but typically, were CLP's DSOs roughly running where yours were, or were they higher or lower?

Just a couple days higher.

Okay. So you'll probably bring those down a little bit, but not a lot.

Yes, absolutely, just not even probably to [inaudible] all.

Okay, great. Thanks again.

You bet, thanks, Jeff.

The next question is Jim Janesky with Ryan Beck.

Yes, good morning, Steve and Joe. A couple of questions. When you look at the CLP acquisition and the accretion estimates that you put out there, roughly about $0.03 for 2005, and when you look at the leverage that you gained, both with the customers and the workers, let’s say, versus the Spartan acquisition, it's more complementary to the base within Labor Ready. Do you think that that could provide margin upside and that the accretion level could go up over time?

Yes, it will definitely go up over time because one of the things that drew it down in the beginning is the amortization of the intangibles, and so we’ve booked -- that's going to cause 500,000 or so per quarter of extra amortization for the next 6 years. So, get that out of the way, and that's a very fixed cost if you will. There’s no -- it’s non-cash, so all the leverage comes above that, and there's absolutely a lot of leverage upward, Jim.

But that aside, do you think that as you looked at the acquisition, this could be more profitable down the road because of its complement, almost, to the business?

Well, I think Joe did a great job explaining that complement on the last question. Let me take it from the finance side. We're not really looking to cut the back office costs, so there's not going to be an initial gain in the first year or two from back office cost consolidation. What this really is, is the way Joe described it, is that the integration's going to come at the point of touch with the customer and the workers.

So the goal here is to leverage up the cost structure that exists, use the support services cost by expanding the number of offices and expanding, as I just mentioned on the last question, the average branch size being about $2.2 million, moving that number closer to $4 or $5 million through the help and the integration with the point at the customer level. So, yes, there's a lot of room to upwardly move this number, but it won't happen in the first 4 to 8 quarters. It's going to happen gradually as we grow the operation. There'll be a lot of leverage out of that organization.

Okay. Getting back to same-store sales growth in your core business and your organic growth, obviously, we saw that number move around during the quarter. You did warn us, so to speak, of that on your last call when you said, “Hey look, we're going to trim our top line estimate while increasing the bottom line estimate,” and now that seems to have recovered. So if we look at both sides of the equation, Joe, is there anything on the horizon that could particularly worry you as we go through the September and December quarters, and on the flip side, is there anything on the horizon that particularly excites you about the business?

As far as the guidance, we've shared that to be 7% in the third quarter and we gave guidance for the year, so that's our best thinking on that. I often -- you've seen that slide we share as far as past post-recession, and the part that -- what I take out of that slide is even after the 90s recession, there was a lot of volatility when you look at it from year-to-year and month-to-month, or quarter-to-quarter, month-to-month, goodness yes. So, I think we should expect volatility in this post-recovery, but at the same time, we're very comfortable that we see a sustained recovery.

And again, the measure for that for me, Jim, isn't so much a 4 week period, because I know there's going to be volatility on a 4 week period. The measure for me is that it's across the board; it's across all the states, and it's not just Florida growing; it's all the states growing -- a little weakness in the Detroit area, of course, with the automotive industry, but you're going to get that on a sector. But as far as looking at the recovery across industries and across states, it's still very broad, and that to me is a positive because going into the recession, we start seeing large regions of the country going to recession. There's no indication of that today.

Okay, thank you.

You bet.

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

Good morning. I'm wondering, in terms of CLP, can you give you us a feel, now that it's been under your guidance for a month, what exactly are you seeing in terms of the gross margins and the operating margins for that business?

Yes, they really haven't changed much, Mark. We bought a great business with great leadership, great strategies. We bought into that team, and so we support that. So, in the first 5 weeks of owning them, actually, now a couple weeks into the second month, that team is just striking right on the strategies they already had in place, just executing what we bought. And so, we're really not in there tinkering around. Again, they've got a great team that's running it, and no, we haven't seen any changes in trends on any of the operating metrics that -- where we're at. Like Joe had mentioned, it wasn't broken, and we just want more of the same is what we want there.

Can you remind everybody what that margin profile was?

Well, the only kind that we've really made there -- we haven't broken it out separately -- is making the statement that their gross margins are similar to ours, up around 30%, and the EBITDA margins are running very close to where ours are also. And we know that over the next few years, there's going to be some extra amortization taken because of the intangibles, but really focused on the gross margin percentage and what we produce in what we'll call the EBITDA, which is the income coming out of operations there, very similar to Labor Ready's, and more so once we get it leveraged a little bit. They have a great management structure there that we can leverage for quite a while, as far as growing the number of offices and growing that revenue camp.

Mark, what we like about CLP is we're their banker. They don't need an outside bank anymore. We provide the workers' comp umbrella under our policy, and God forbid they need an attorney, we got a couple.

Okay. What sort of integration expenses, if any, did you absorb during the quarter to bring CLP into the fold?

There really wasn't much there. I mean a little bit of -- most of that got capitalized as part of the acquisition, so the only costs since then aren't capitalized, and that's just management time doing a few things. We started the planning of integrating a couple of the states. We had a couple offices down in Texas that we were focusing on skill just because we were so excited about that area, and what we've done is, in the month of July, transferred the management of those two offices over to CLP Resources, so now they have a foothold in Texas.

And, as we mentioned a couple questions ago, probably a couple of the openings we've been planning for the last half of '05 will be CLPs in Texas, so we can get a good stronghold going in Texas, and then Joe spoke to the enthusiasm of Florida. So we started a little bit of integration planning on those two states. It hasn't been significant, but most of that was capitalized like I mentioned and just a little bit of operating costs since then.

Okay. Then, as we think about your normal SG&A leverage relative to the performance this quarter, you indicated you expect about 80 basis points of improvement for the entire year. What are the aspects that would change in the second half relative to the second quarter that would lead to greater SG&A leverage in the second half?

It mainly comes through -- the third quarter's our largest quarter --

Sure.

-- and the same-store sales bouncing back. It's amazing what a couple points does there for you. So we're going to get some more leverage out of that. Probably the cost component that's changed the most for us over the year has been the average headcount in our offices. A year ago, we were running just slightly under what we would call a good staffing model, the salary level, the headcount level that we allowed our branch level and here at corporate. So as we look at that, what we'll call the staffing model, we were running slightly under that a year ago. Now we're running pretty close to being right on.

That excites us, actually, even though it cost us a little bit in the second quarter, maybe 20 or 30 basis points of SG&A, and the fact that we were running fully staffed this year and last year slightly behind, but that's great momentum going in the third quarter because the branches are solidly staffed; they’re well trained; the turnover rates are well in control. And I think that bodes well for us for the second half of the year. But it is a cost component that's running slightly higher by 20 or 30 basis points this year compared to last.

Were you running behind throughout the year, including the second half of the year?

It got to be less towards the end, but definitely in the first 3 quarters, we were probably picking up 30 or 40 basis points a year ago.

Okay. In terms of the gross margin that you would expect, you indicated it should be somewhere around 30.7%, assuming on a normalized basis. Is that what you would expect for next year, based on what you currently know?

Well, it's a little early to start calling next year, but we’ve spoken that this is a 30% gross margin business, and we'll fight day-in and day-out to keep our margins in line. We're very pleased with where they're at this year. We don't anticipate them falling back below 30. Now, if our business mix changes, we'll inform you in how that drives our business. It shouldn’t change much with CLP because their margins are in excess of 30, but as the Spartan business comes on, their margins are less than 30. So the mix of that business coming up could drive our margins down long term, but it's not significant at this point. That shouldn't impact the EBITDA margins because their SG&A percentage is so much lower. Really, we're not prepared to talk about '06, but I can tell you that we would fight like crazy to keep our margins above 30% next year.

Okay. Then, in terms of worker supply, the unemployment rate for people without a high school degree is fallen down to 7%. Are you seeing any signs of difficulty in terms of recruiting workers, any spot shortages anywhere, or how's that going?

Yes, those high school dropouts are our workers. I think if they spent a couple days working at Labor Ready with a shovel, they might get back to school. The truth of the matter is, there’s always a lot of unskilled workers in our economy, and their opportunities are limited. Our goal is to -- obviously, if someone was dropping out of school, I encourage them to stay in, but as far as worker shortages, we don't really see those. I would still stick to the statement that there's pocket shortages, so if you go into southern Cal right now, they'll tell you there's some worker shortages. Arizona's picked up some worker shortages. We also have a screening, too, that affects that. We screen out a number of workers. And Florida has always had pocket shortages of workers. If you're in the northeast, there's plenty of workers, the midwest, northwest. So if you look back historically, that's the same class we've always had, some spot shortages. Looking longer term, demographics will affect all businesses as baby boomers move through, and I think it's going to be more of an impact, quite frankly, on skilled than unskilled. But that's kind of a crystal ball thing.

Great. Then, can you talk a little bit about whatever sort of trends you may have been seeing in terms of same-branch revenue growth in the month of July? You gave us through June, and it sounds like, based on your guidance, that you're probably seeing something like 7%, but I just wanted to confirm that.

Yes, that's right. We just said it was trending up from June slightly and then our guidance is 7, so that's a pretty good indication of where we're headed.

Okay, great. Thank you very much.

You bet. Thanks, Mark.

Your next question comes from Jim Wilson of JMP Securities.

Hi, good morning, guys. I’m sure pretty much every question in the world has already been asked. I was going to say just one thing on your existing business, can you give a little more color, either percentage of same stores or percentage of total revenue, that your biggest markets generate? For instance, if I recall, Florida is maybe somewhere around close to 20%, and then what would be like number two and number three, and what growth impact on total revenue or even on the same-store count do those -- ?

Yes, we don’t have a breakdown for you for same store by state, but really, the only thing we've spoken to in the past is our top 3 states being California, Texas, and Florida -- California just being slightly less than 20% of revenue, and Texas and Florida each being about 7%, so the 3 combined being about a third of our business, and that's really the only disclosure we've made on that.

Okay. And adding a little less to that includes -- that's the just the base labor ready business?

Yes, and we haven't re-disclosed anything with the combined businesses yet.

Okay, got it. That's all I got.

Alright, thanks Jim.

Thanks.

The next question comes from [Evan Moweln] for [Sirion].

Hi, guys. I have a question regarding workers' compensation. If you look back sort of 3, 4 years ago, what percentage of sales was workers' comp running for you at that point?

Higher.

It hit about 8% at it's top, and that would've been at the end of '03, and we'd actually started our projection for '04 as a whole at 8%, and I believe we finished the year 2004 at a run rate of close to 7.2, and so that's kind of the 10% that we'd stated we've taken out that 0.8. That's right where we're trending right now is about 7.27 to 7.2 So it did hit its peak at 8%. The year's -- what was a good phase was it was running at 5.5 probably before in the late '90s before it took off. At 7%, we still have some work to do to get it down to about 5.5, but we'll work in that direction. Hopefully, I'll be getting bill rates up, that helps,and managing the cost number, that helps.

And I guess two follow-ups on that then. And the first is, is there sort of a one for one gross margin relationship? So, if it went back to -- if your workers' comp percent went up 1%, would that just take gross margins down by 1%, or is it bigger than that?

No, it would be one for one the way we quote it. But the thing you have to keep in mind is work comp is a pass-through cost, so there is a tiny difference. For instance, if I had to go back to 2002, where we made the decision to accrue more for workers' compensation because we got on top of this and we understood our cost structure, it took us a few months, maybe even at that point in time 6 months, to get a pass-through to our customers. Now that it's going down, some of it's reflected in the industry. It's not just -- we've put a lot of great preventive measures in place, but workers' comp is actually going down nationwide, especially in the state of California, not at the same percentage ours is going down, but there is less pressure there.

So what happens is there's a competitive environment to our bill rate that involves workers' compensation insurance. It's not just all about the bill rate and the pay rate to the worker. It involves what component is workers' compensation. So, before selling our services to a construction company, they know the cost per employee because of the pay rate. They also know what they have to go out and buy workers' compensation for for that employee and that becomes a very competitive situation because your competitor is not always somebody else that offers staffing. Sometimes it's the customer can go do it themselves, if you get -- Joe had mentioned earlier in the call here, that our long-term goal wouldn't be to take our gross margins sky high. And the reason is, if you start pricing yourself out, it's cheaper. It invites the customer to go do it themselves, go find a worker and go buy the workers' comp themselves. I guess what I'm saying there is, it's pretty transparent for the customers to know what your workers' comp costs are.

Does that mean that you're getting a temporary benefit in this direction?

It could be.

And so you may end up giving some of that back?

Right. That could happen throughout the cycle. The customers catch up with you. Their costs aren’t coming down in this area, and so you have to be more competitive. In our business, it's great, because we don't have contracts, so we don't get stung too hard on the front end, and then in a competitive situation, we can give it back, as long as our costs are coming down when it's coming down.

And then, back in the late '90s into the early 2000s, what was it that triggered your expansion and your reserves from 5.5 to 8%?

That was a period, Evan, that was largely driven by medical cost inflation.

Don't we have a lot of medical cost inflation now?

There's two components to workers' comp. One is the incident rate, which fewer accidents obviously help, and that's 10% down. The offset to that is medical cost inflation. So what you're looking at, in our workers' comp, is a net decrease where our accident rate is reducing workers' comp at a higher level than medical cost is going up. That's what the actuaries do. That's what their job is, is to predict future cost inflation and build that into our reserves.

Okay. All right, great. Thanks for the help, guys.

You bet.

Your next question comes from [Kurt Molder] with RCM.

Good morning, ladies and gentlemen.

Hey, Kurt.

I just wanted to check on something. The leverages in getting from, on the SG&A side, on the same-branch revenues, will there be anything different about that over the next few quarters than what you've been getting?

Yes, I spoke to our 4 to 1 ratios that we hold ourselves to.

Right, and you don't see that changing in the near future?

Right, the numbers that I laid out at the end of my prepared remarks were talking about 2005 as a whole, so we've got a 16% revenue guidance out there with a little more than 50% net income growth, and then I went through the components of what were 50% income. And that ratio of 4 to 1 is holding, so yes, we still believe in that and as same-store sales comes to us over the next few quarters, we're going to hold to that ratio and get leverage out of that business as it comes.

Are there going to be any integration costs for CLP?

No, as I've mentioned, most of the costs -- all of the due diligence in getting it closed was capitalized, and then integration, as we've mentioned, we're really not doing a full blown consolidation here. This is a business that we're going to expand, not contract, so we don't have any integration on that. We're not combining our offices, our sales offices out in the field, the back office. That's the support structure that's going to grow CLP Resources to their goals, and so there's really not a lot of integration taking place. They stand alone as far as their branch support goes, their customer support from a receivable point of view, and we're not cutting those positions. We're not cutting that office. We're holding them and excited to have them on the team to help them grow the business.

What kind of annual amortization will that be?

It'll be about $2 million for about 6 years.

Thank you very much.

You bet, thank you.

Your next question comes from Mike Carney of Stephens, Inc.

Hey, one question. It's probably just us on the call now, but in the UK, going back to Jeff's question, just excluding any volatility, obviously, some of the economic data's been up and down in recent periods, but assuming that the business continues on its pace, how close right now are you to break-even there? And then also, assuming that you continue to believe in the UK, when are we going to hear something from what the next region and country's going to be?

Well, for starters, the UK -- we had disclosed last fall that they were real close to breaking even, and that's kind of where it remains. Heading in -- the fourth quarter finished pretty strong for us, and first quarter wasn't bad, and as I disclosed here today, the second quarter wasn't all that great. We're not opening a lot of offices over there this year. I think we took on a very small number; 4 or 5 is actually what we're opening in the United Kingdom this year. And so we're really giving them a chance to, number one, mature their leadership, and that's happening, and then mature the brand name in the marketplace, so it's easier to open those next set of offices. So, that 's kind of where we're at.

Rather than throw more cost out at this point, we're letting that mature, which will bring us to profitability, and then open another 50 offices in the United Kingdom over the next 3 to 5 years, something like that. We haven't set that target yet, but right now we're in a maturing state, and we're pleased with that. We were a little -- yes, there was some hard hit economic areas, especially in some manufacturing areas over there. We've seen those bounce. We're headed back to a positive growth rate in the United Kingdom. It was very short lived, and we are excited about the United Kingdom still. We know that we can get 100 branches in there running and that can be a very profitable region of the world for us.

Right now, they're in England, Wales and Scotland, and the only other country there would be Ireland. That's part of that 100 branch count that we see, Mike.

As far as other countries, we haven't gone there. We have a lot of initiatives here in the United States. We're very pleased about the diversification initiative that Joe has spoken about here today. The initiative of expanding in the United Kingdom just kind of blends in with our expansion of US and small markets, so we kind of blend those together and just approach this as human capital is ready and markets are ready, and we just have a lot to focus on here in our diversification strategy.

And so I think with Spartan and CLP and with a blend of continuing to penetrate in these other markets where we currently exist and good strategy, but again, we want to state over and over, that our number one goal here is to grow same-branch revenue and extract the profitability available through this 1 to 4 ratio, this 4% growth in income. That really is the big payoff here for us, and so most of our effort, most of our initiatives that we've taken on internally and talked about are related to improving the productivity of each branch and improving the productivity of each employee, making sure that all the investments that we're making surround those two initiatives, and that we don't distract ourselves from that initiative, improving productivity at that branch level, improving productivity at that employee level.

The initiatives are really complementary.

Is it fair to say that given that you have some acquisitions now, and you've got a number, more than four, strategic growth initiatives, that it may put off, so some extent, your international expansion?

Yes, I would think that's fair. We never really had a good road map for international expansion. We're kind of cutting our teeth on the UK and learned a lot in that process, and they speak the same language. And so, we always have to look at the highest and best return of our shareholder capital, and at this point, I don't think another country outside of that United Kingdom can really compete with the return we can get on further expansion of CLP, Spartan and Labor Ready in the existing 3 countries. So it's not that it will never happen, but it's not our focus this year.

Got it, thanks.

You bet.

[OPERATOR INSTRUCTIONS] Your next question comes from Mark Marcon with Robert W. Baird.

I just wanted to ask a quick question with regards to the tax rate. Would you expect the tax rate to stay around these levels for not only this year, but next year as well?

Yes, I believe so. There's definitely [inaudible] that would be any different at this point in time. That 38 looks good.

Okay. And then, I know you're not counting on it, and I know you can't predict it, but based on the way your trends have gone, what's the potential that you may continue to see some further reversals in terms of accruals as it relates to workers' comp from prior periods?

Yes, that's just an area that we really can't even speak to because that's all governed by the actuaries. They just did a study. They do a study every quarter, so they gave us their best number at the end of this last quarter, and for them to say there's pent-up trending going one direction or the other, they just won't, and they just calculate the number as is, as it stands at the end of that quarter, and there's your number. And if you ask them that question that you just asked me, they don't get it. It's a mathematical question; it’s a mathematical computation at a point in time. I can speak to what we're doing in operations, and that is good stuff.

Right.

Further screening of workers, further screening of customers, very well trained people in our offices, a safety team of about 10 or 12 people that we didn't have 18 months ago that are out teaching our operations staff. I feel that our employees are better trained, better aware of safety initiatives than they've ever been, and they care about it. They care about our workers. They want to make our customers successful. They're very cognitive. It's on their minds about safety day-in and day-out. So, I don't know if that existed 3 years ago. It was there, and we had awareness, but it didn't exist at the level that it does today.

What we're talking about too is incident rate, Mark, and that's something that has influenced the last year and will influence going forward, a lower incident rate. But when you're looking at prior year reserves, those incidents have already occurred.

Right.

And so it's really the actuaries’ best estimate, and that's really what we would recommend you use. The guidance we've given you excludes any further improvement in the prior year reserves, which would have to be based on a lower cost that they expect in the future, different types of benefit changes that might occur in the space. And the way we work here at Labor Ready, and it might help you in thinking about this, is the only thing we really control in this respect is incident rates and making sure that we have a cost structure of medical services that's efficient out there, and that's it, managing those claims. So our estimate in the reserve is our best estimate, based on actuarial analysis and their recommendations to us.

Okay. And now in terms of the current period improvements, how much further do you think you have to go in terms of -- I'm sure you've picked off the low hanging fruit; you've started these initiatives in the markets where you had the biggest issues, but how much further do you think you have to go in terms of getting this improved safety culture and the reduction in incidents on a nationwide basis?

These programs are nationwide, programs that we've limited to [inaudible] the cost benefit analysis that we do is the screening of workers and the cost of screening those workers. And so that's based on [inaudible], like you said, the northwest, California, part of Texas, is the largest space in that regard, and that screening has really effectively worked there. We work off of -- we measure every month what we call the worker safety ratio by branch, by district, by area. We monitor that. And so that's how we know where to go if incident rates start increasing. It's just a measure of incidents. And if districts are having challenges in that regard, they can implement this worker screening program by district, by area. We leave that up to our operators, but we look at it from a ratio perspective.

So putting aside the worker screening, the culture of safety, which is sight inspections, screening of customers -- we still screen workers, just not necessarily through a survey in every state. That's a culture that's in every office at Labor Ready, and we have no tolerance for any preventable accidents. You're always going to have an accident, but if we learn that branch managers or district managers are looking at this in a cavalier way and not caring about the safety of our worker, and putting them into harm's way, it results in termination -- first coaching, then termination, if they don't get it.

Great, thank you.

You bet.

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

Well, thank you, everyone. We appreciate the time you took this morning to listen to our comments and ask some really good questions, so thank you.

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