TrueBlue Inc (TBI) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Labor Ready 2005 Third Quarter Earnings Conference Call. Today's conference is being recorded. Joining us today is Labor Ready CEO, Joe Sambataro, and President and CFO, Steve Cooper. They will discuss Labor Ready's third quarter earnings results, which were announced yesterday. If you have not received a copy of this announcement, please contact Lisa Latrell(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. Stacy Burke for the reading of the Safe Harbor. Ms. Burke, please go ahead.

Here with me today from Labor Ready is Joe Sambataro, Chief Executive Officer, and Steve Cooper, President and Chief Financial Officer. They will be discussing Labor Ready's 2005 third 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 10-K and 10-Q.

I will now turn the call over to Joe Sambataro.

Thank you, Stacy. Good morning, everyone. I am very pleased with the results we announced yesterday, revenue of $360 million compared to revenue of $296 million for the third quarter--compared to the third quarter of 2004. Net income for the quarter was $21.8 million or $0.40 per diluted share, as compared to $15.6 million or $0.31 per diluted share for the third quarter of 2004.

Our team at Labor Ready continues to drive revenue while controlling costs and improving margins. We had solid momentum for the quarter, and customer demand is strong. I would like to provide an update on our operations on the Gulf Coast and its impact on our overall operations.

Of the 20 Labor Ready branches located in the hurricane-affected areas in Louisiana, Mississippi, and Alabama, 16 are currently operational and are actively assisting evacuees and others in finding temporary employment. The four branch locations that remain closed are located in the Greater New Orleans area. We are serving all temporary employees and customers who relied on those offices out of nearby branch locations.

Labor Ready does an incredible job of putting people to work everyday. Under the worst of conditions and despite their own personal losses, our field operators and corporate support teams worked aggressively to restore our operations and find jobs for the evacuees throughout the affected region, as well as in many outlying states where the evacuees were relocated.

We are now seeing an increased demand for temporary employees in the area as cleanup efforts get underway. Since we are in the cleanup phase of the recovery, a lot of the work is debris removal. The number of jobs we are filling varies by community. For some communities, the demand for workers is greater than the supply. Unlike the hurricanes last year in Florida, Katrina changed the landscape and record numbers of people were evacuated. For the short-term, we have seen a shortage of workers. We are working in close cooperation with relief agencies and local organizations to provide the opportunity for evacuees and others to find work and begin to rebuild their lives.

Overall, Katrina and Rita had no material financial impact on our results for the quarter, since Labor Ready's business is so much larger than the devastated area. We expect to actively participate in the long-term reconstruction efforts to restore these communities to their pre-hurricane status. Likewise, the other industries we serve and jobs we fill will also play a part in the rebuild. Everything from manufacturing, transportation, light industrial, shipping and receiving, loading and unloading, landscaping--the list just goes on and on. As Labor Ready's teams work to repair and rebuild the Gulfport Region, I am extremely proud of their personal compassion and dedication, and for being a valued service in our communities.

Our third quarter results again demonstrate the organization's ability to profitably drive top line sales growth, while at the same time managing costs and improving margins. As we finish out the year, we will continue to drive our businesses around the three key strategies that have driven Labor Ready's financial performance over the last several years, grow current branch revenue and profits, expand our operations into new markets in the U.S., Canada, and the U.K., and expand with additional brands and a diversification of services.

To drive profitable top line sales in our core brand, we expect to increase same store revenues, improve branch manager tenure, and maintain our disciplined pricing and cost controls. We will also be intently focused on executing initiatives to expand our other brands, aggressively identifying new customers and new markets as well as cross-selling opportunities.

As we look forward to the fourth quarter and 2006, we are optimistic that we can continue to deliver solid quarterly earnings to our shareholders. The management team continues to meet and exceed profitability expectations. We are pleased with the consistency in which the organization has delivered on its operational strategies. I am confident that we will continue to leverage the strength of our brands and capitalize on the competitive advantages we have created with our network of more than 890 branch locations, all to the benefit of our shareholders.

Before I hand the call over to Steve, I'd like to recognize him for his recent promotion to President. The Board unanimously approved his promotion in September, at which time Steve assumed executive leadership of the Company's operations. Already, Steve has met with a number of our operators in the field, listening to their input, and asking for their continued contribution and participation in building the Company's future. Steve has worked closely with me, other members of the executive team, and the Board of Directors for the last six years in his role as Executive Vice President. We are fortunate to have his strategic business management, financial expertise, and leadership in this new role.

I'd also like to take this opportunity to publicly welcome another recent addition to our team, Corporate General Counsel, Jim Defebaugh. Jim has over 25 years of legal experience, the last 22 of which were in corporate law and administration at Kmart. We are pleased to welcome Jim and appreciate the strength he has already brought to our team.

Both Steve and Jim report directly to me and I look forward to overseeing their growth as we move our Company forward on its road to continuous success.

I'd like to turn the call over now to President and CFO, Steve Cooper.

Thank you, Joe. Thank you for the kind words and support. It is a privilege to be couture to our operations on a daily basis. Good morning, everyone. As previously noted, revenue in the third quarter increased 21.7% as compared to the third quarter of 2004. The increase in the revenue during the quarter came from the following categories. One, branches opened one year or longer increased 8.7%, which included an approximate 2.9% improvement in the average bill rate and 5.8% growth in hours billed.

New branches open less than one year, excluding the acquired branches, improved at 90 basis points of our revenue growth. Three, branches closed during the last 12 months accounted for a loss of 90 basis points in revenue. Four, the CLP Resources operation that we acquired on May 27, 2005 contributed 12.8% growth in our revenue for Q3. And five, currency fluctuations accounted for the remaining difference of 20 basis points.

Our monthly trends that made up the same branch revenue growth of 8.7% for the quarter were as follows. July grew at 7.4%, August at 9.4%, and September at 9.1%. These same branch revenue growth rates were slightly ahead of expectations we had at the beginning of the quarter, based on the results we experienced in the second quarter.

August and September were slightly easier comparisons to the prior year due to four large storms in those periods in Florida in 2004. The cleanup for those storms occurred in the fourth quarter, which will make a slightly tougher comp for us this year in Q4. The storms in 2005 in the Gulf states had no material impact between the quarters as the number of branches impacted in those states versus Florida in 2004 is not material. And the downtime for the storm and the recovery cleanup period for the storm happened in the same period.

We are expecting same branch revenue growth of approximately 7% in the fourth quarter, which is in line with what we had expected at the beginning of the quarter. We have seen the recovery from the past recession stabilize in the 7 to 8% range with some volatility on a month-to-month basis. Our best estimate of our growth going forward at this point remains in the 7 to 8% range. Geographically, the improvement in same branch revenue was widespread. And we see the show of improvement in most geographic areas in the U.S.

On our last conference call, we pointed out that the eight weeks leading up to our second quarter report had produced improving trends across most geographies as compared to the second quarter, and especially compared to May. We are pleased that these improvements continued into August and held strong through September and now into October.

Our international areas continue to have mixed results. Canada's performance has been strong in 2005, with revenue continuing to grow in excess of 10% for the year as a whole. The results in the U.K. have declined by 5% year-to-date in 2005 compared to the same period in 2004. We are pleased, though, that the U.K.'s week-to-week sequential trends have stabilized over the past quarter, and we remain confident that our U.K. operations will return to a positive growth as we move into 2006. We believe we are well positioned in the U.K. to continue to grow the revenue in the existing 50 branches we have established, and continue our plans to double the branch count in the U.K. as we see the economic conditions begin to improve there.

As we disclosed in the second quarter we acquired the operations of CLP Resources on May 27. We also opened two new locations for CLP during the third quarter. These 53 branches accounted for 12.8% of our growth during the third quarter. That is approximately 14% year-over-year growth for CLP resources during the 13 weeks of operations, compared to their same operations a year ago. Construction growth continues to have a solid outlook here in the U.S., which is helping drive CLP Resources' great results.

Today, we have provided guidance for the fourth quarter. That revenue is expected to be $325 to $330 million, which is about a 20% growth over the fourth quarter of 2004. Approximately 13% of that is expected to come from the acquisition of CLP, while the remaining 7% will come from the Labor Ready and Spartan branches that we have operated for over 12 months, as the revenue growth for new organic branches is expected to be equal to the lost revenue from closed branches over the past 12 months.

Our gross profit as a percentage of revenue in the third quarter was 31.3%, up from 30.9% in Q3 a year ago. The improvement in gross margin percentage came primarily from the improved trends in Workers' Compensation costs for the current period of about 50 basis points of revenue, based on a lower accident rate than we had experienced a year ago. We also had positive experience adjustments to Workers' Compensation reserves established in prior periods.

The adjustments we experienced in the third quarter of 2005 were very similar to the adjustments we received in the third quarter of 2004. Therefore, the adjustments did not result in a year-over-year improvement in gross margins in Q3. The prior year work comp reserves have been lowered by our actuaries in each of the last five quarters, which has brought the Workers' Compensation cost as a percentage of revenue in at about 6.5% for 2005 year-to-date.

We continue to project the 2005 Workers' Compensation cost to be about 7% of revenue on a go-forward basis. The 50-basis point difference is related to the reserve adjustments, which we cannot estimate if or to what amount they will be in the future. The reductions in both the prior year reserves and the ongoing Workers' Compensation costs are related to the various loss prevention measures implemented in our operations that had reduced our accident rate by our 10--by over 15% as compared to the beginning of 2004.

Although we are comfortable estimating the ongoing cost of work comp to be lower than the prior year by about 50 basis points, again, we cannot predict if the prior year reserves will have any further adjustments as that is a calculation run by our actuaries each quarter. The gross margins in our CLP operations were very similar to our Labor Ready operations. Therefore, there was no measurable impact from the blending of those operations in our overall gross margins.

We expect gross margins for the fourth quarter of 2005 to be approximately 30.8%, lower by about 50 basis points than our year-to-date gross margins of 31.3%. This is due to the work comp adjustments we have received. And again, we cannot estimate further reductions at this time.

Selling, general, and administration costs for Q3 as a percentage of revenue were 21.2%, equal to the same percentage as a year ago. We did not get as much leverage this quarter as normal on our SG&A costs due to three significant strategies we have been working on. One, the blending effect of CLP Resources having a higher cost structure than our existing operations are almost 2% of revenue in Q3, which resulted in our blended SG&A percentage to be higher by 20 basis points.

The invest--two, the investments we have made in loss prevention related to lowering work comp costs have resulted in about 15 basis points of new cost this year versus last year. Three, we have been investing in our sales and operations teams in our existing business this year by adding certain sales teams to selected markets, and continue with the bonus plan that is tied to increasing operating income. This has resulted in about 15 to 20 basis points of new costs for extra salaries and bonuses. We do not expect to lose any leverage going forward from the costs that have been added from these very important strategies.

We do believe that the leverage in our business will continue as it has in the past, with about 22% of each incremental sales dollar going to incremental income from operations. We plan to leverage the CLP Resources cost structure by doubling their branch count over the next few years, while maintaining the support cost structure in place at the current level. We also plan to continue to experience sales growth that outpaces the general market growth by adding new talented sales teams, increasing our market share. These three important strategies together are resulting in about 50 basis points of current revenue in new costs. We believe they are well worth the investment.

At the end of the second quarter, taking into account the three items we knew about that I just mentioned, we expected a reduction in SG&A in 2005, compared to 2004, of about 80 basis points of revenue. We now expect that reduction to be about 70 basis points, taking into account the results year-to-date and our new cost estimates. We remain very confident in the leverage available in our business model, and believe we can further reduce SG&A percentage as we move through 2006.

Average trailing 12-month revenue per branch increased to $1.384 million as compared to $1.263 million at the end of Q3 in 2004. This is over a 9% increase over the past 12 months. Average trailing 12-month sales per employee increased to $389,000 at the end of Q3 in 2005, up from $369,000 a year ago, a 5% improvement in sales per employee. We believe these trends will hold strong as we continue to focus on our key strategy of improving productivity of each branch and each employee, which results in improved revenue and profits per average branch.

By leveraging our operating costs with increased revenue volumes and improving our net cash and debt positions over the last year, we have improved net income margin to 6% of revenue for the third quarter of 2005, compared to the 5.3% a year ago. And year-to-date, we have produced net income margins of 5.2%, up from the 3.4% for the same period in 2004.

We are really pleased with the continued improvement in operating leverage we have seen, and we mentioned earlier, believe we can continue to leverage our costs further, which is the driving factor that has improved our net income margins.

Our net income tax rate for Q3 was 38.3%, an improvement over Q3 a year ago of 39.6%, 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 $0.24 to $0.26 a share for the fourth quarter and $1.13 to $1.15 for the year. This would be a growth in net income of approximately 54 to 57% for 2005, and a revenue improvement of about 17 to 18%. To speak to the leverage ratio we have seen this year, we often state that we can grow our net income in a greater ratio than same branch revenue. AT our current branch sizes and profitability levels, we expect that ratio to be between 3 and 4% income growth for every 1% of same branch revenue growth.

So bear with me while I attempt to reconcile the ratio expectation with our real growth in net income. Included in the normal operating leverage ratio that I will describe. there's five categories that I will put this net income growth into. First, this 2005 same branch revenue expected to be approximately 8%, we would expect that to drive net income growth by about 28 to 30%. Second, we have spoken about our prior year work comp reserve reductions through the third quarter of about $1.8 million pre-tax per quarter. That will account for about 8 to 9% of our expected net income growth.

Third, we have had an additional gross margin improvement beyond the prior year reserve adjustment that was driven primarily by bill rates growing faster than pay rates, which is expected to provide about 9 to 10% of our net income growth. Fourth, the CLP Resources acquisition is expected to provide approximately 6 to 7% of our net income growth. And fifth, the conversion of our convertible notes will reduce interest expense by the year by $2.2 million pre-tax, and this will impact net income growth by about 3%.

You can see that with our normal operating leverage holding, along with some other great events that we have worked hard to execute, we are expecting to produce approximately 55% improvement in net income as compared to 2004, driven by these various strategic and operating plans.

Joe and I, along with some members of our Board of Directors and senior management team, will be in New York City on November 16 to conduct our third annual analyst day. We will host a lunch and presentation with Q&A to follow. We estimate the entire event to run from about 11:30 a.m. Eastern Time to about 2:00 p.m. If you have not received details about the event and you are interested in attending, please give us a call and we will get you the details so you can RSVP.

We appreciate you spending time with us this morning to allow us to update you on our great results for 2005. At this time, we will open up the call for any questions that you may have.

(Caller Instructions.) Your first question comes from Craig Peckham of Jeffries and Company.

Hi. Good morning, Steve and Joe. I just wanted to clarify a point as it relates to CLP and the year-on-year growth. I think, Steve, you had said it was 14%. Is that a same branch revenue growth number or is that on a consolidated basis?

That's on a consolidated basis. They have approximately five new branches in there, and I don't have the breakdown of what that is. But there are 55 branches and they ramp up a little slower, but the bulk of that is same store sales.

Okay. And I know you said that on a year-on-year basis the reserve adjustment had no impact on gross margin. But could you just give us a sense--if we look at the third quarter of '05 in isolation, how many basis points did that add to the gross margin, ignoring the prior year level?

The third quarter reserve adjustment was about $1.8 million pre-tax, which was very similar to what it was a year ago.

Okay. I guess the last question, could you elaborate a bit more on some of the investment that you are making in these new sales teams? What parts of the country you've been including this to work? And talk about how going forward you are going to be able to kind of measure the productivity and return on that investment.

Yes. That comment is two-fold. Actually, I said there's like 15 to 20 basis points of new cost related to sales and operations teams. A very small piece of it is a couple new sales teams that we've put together that--one is in the Northeast and one is down in the Southwest. And they are operating a little bit differently. But the bulk of that cost increase really has to do--well, it's two-fold. One is our turnover rates have stabilized and we've set up some initiatives to bring branch manager turnover down. And with that, we had less open positions during the third quarter. So part of it was that.

So there is a blended effect of what I'm talking about, that we are fully staffed. We fell very comfortable with the staff that we have right now, which is very motivating for us as we go into 2006. We believe that we're going to have a very well trained--not just sales--these new sales teams, but full branch staff in all markets. So it's a combination. And then, the third item really driving that is our new bonus programs that we put in place at the beginning of 2004. We're continuing to pay out more in SG&A, but are [indiscernible] to driving the net income that we want. So we're very happy with that. So it's a combined thing. I don't want to lead you to think that we've invested 15 to 20 basis points all on new sales teams.

But with that said, we are experimenting with using a stronger outside sales force. We've been investing in sales training company-wide this fall. We've been investing in two different systems that are going--we believe are going to drive sales in this Company. One is a customer relationship management tool that we built internally back in 2004 that has been more fully implemented during 2005. And now, we have a commission-based program coming on that's going to tie the activity that's in that customer relationship program to exactly what the sales force is working on. So it's going to be tied together really close, which just means more accountability for the sales force and more training for the sales force. And so, we're expecting great things in 2006 out of our sales force in general.

Now I know you asked specifically what markets were we doing this in. And I mentioned there's two test markets of building a stronger team, yet I've described some programs that are company-wide, both the bonus program and in general on two sales initiatives that impact the Company as a whole.

Okay. Thanks for the clarification.

Your next question comes from Jim Janesky from Ryan Beck.

Yes, good morning. Your outlook for the fourth quarter implies a 19 to 20% revenue growth and only--and about 22% bottom line growth. So you talked about--you went into a lot of detail--thank you--about what is causing the bit of the higher cost structure. My question is, when do you think the leverage--the positive operating leverage will start to kick in again? What kind of timeframe do you think we're looking at?

Well, I'm comfortable that the cost structure you saw in Q3 [indiscernible] fully loaded. The thing that's hard to blend in is the seasonal impacts of that. And so, I think my first answer to give you there, Jim, is that we're not further increasing the cost structure or the blended effect of CLP will change because of seasonal effects. But what you saw in Q3 is what you get, and we're not increasing those costs further. So the answer to that is from here going forward. Now, obviously, on the year-over-year basis, there is still going to be some impact in Q4 and Q1 and Q2, but the revenue should be going up from here, and we expect it right now.

Okay. Second question is, when you look at CLP's growth, even if you back out, as you mentioned, new office openings, it's still higher than the core Labor Ready. Is that because--in your opinion, because of CLP's size or because of its focus on certain market--like the construction market? What are your thoughts?

Yes, there's a couple of things that have been driving that. One is, it was a wonderful company that we built, and they really repaired their structure to be a larger organization. The investors that owned them before we did really had the same strategy in place that we have in place today, and that is to expand the size of this business. We believe that two things can happen at CLP. One, double the branch count, and, two, double the average revenue in each office. Those are two extremely exciting things.

But to do so, it takes a pretty good-sized support structure being ready to carry that out. And their investors were willing to make those investments to help that team be ready for that type of growth. We support that. We like their strategy, we like that team, and we're confident in them. Therefore, we didn't go in there and do cost cutting. The first thing we do is say what can we do to support you further or help you get these offices open faster and grow those same store sales. So that's really what we're working on there. So it was really a back office structure, if you will, but runs at a higher percentage of branch revenue than Labor Ready does. So that will take care of itself as we leverage those two things, added new branches and increase same store sales in those branches.

Two, within the walls of the branch, their cost structure also runs higher, mainly due to the efforts that you have to put in place to recruit. It takes a stronger recruiting staff in a CLP branch to execute the business plan. And so, the cost structure is slightly higher in a CLP branch because of the salaries that are put into it.

Okay. And final question. In the U.K., we can certainly appreciate that the economy--and there have been other companies who have reported that growth in the U.K. has slowed down. But one--I remember at one time--I guess the question is, are you any less excited and do you believe that the--about the U.K. market? And do you believe that the growth coming in down 5% has to do with market or is there something that you're going to change in the way that you're executing over there?

Our business model works in the U.K. and we're real pleased with it. We're unique in many respects over there as well in that we continue to focus on small and medium-size businesses, open at 5:30. This uniqueness does separate us from the crowd there. I think we have lots of room for growth, not only in branch count, but also in growing the average branches. Where--we had a leadership change. Our expatriate that we sent over there is transitioning this year, and so, we're in that process. And so, near term, we haven't made any final decision, but we're probably going to hold off on some new branch count while we get some new leadership developed and trained. But for the longer-term perspective of three to five years, we continue to see the build-out to a potential of 100 to 125 branches.

Okay, great. Thank you.

Your next question comes from Michelle Moran.

Hi. This is Dan Suzuki on behalf of Michelle. Just a couple of questions. In regards to your Q4 [indiscernible], what are you assuming for the [indiscernible]?

Go on, Steve.

Approximately 54 million shares.

Okay. And with regards to the CLP acquisition, what kind of seasonality and potential impact should we expect going forward? And in particular, Q1 and Q2 of next year.

Yes. We don't believe--it's not going to impact the Company as a whole to a material extent. We've looked at their seasonality versus ours, and their seasonality matches our construction, which our construction is about a third of our business. It's slightly different, but it's not going to change Labor Ready as a whole--seasonality.

Okay. And staying in CLP for a second, do you happen to have the same store sales figures by month if possible for CLP?

I do not.

Okay. But as a whole, how has it been tracking relative to your original expectations?

It's been right there, maybe even slightly ahead. Obviously, when you buy a company, you put some conservative estimates in so you don't have to disappoint yourself. And you want to get over certain [indiscernible] thresholds. So it's going past those conservative estimates, but they are really close to being on track with where they thought they would be for the year, and we're excited about that. So when we compare it to our own business, we're thrilled with CLP's results.

Okay. And then, just one last question. I believe you recently had some board meetings. And I was wondering if you had any update on your latest thinking with regards to the possibilities of [indiscernible] share buyback?

Yes. Dan, each board meeting we discuss the subject and evaluate if there are any possibilities of further reinvestment into our strategies with dividends and share repurchase. And the Board's conclusion in September was to stay focused on our strategies to grow our business, because we believe that's the highest return to our shareholders. At each board meeting, we'll--we always review it.

Okay. Thanks very much.

Your next question comes from Levon Fischer with Harris Nesbitt.

Hi. Thanks for taking the call. Just a quick question for bookkeeping. You said the change in the bill rate was 2.9%. What was the change in the wage rate?

Let me grab that for you.

While you're getting that, I just wasn't clear on the number. The monthly trends. You said it was up 7.4 in July. Was it up 9.3 in August?

Yes.

Levon Fischer. Yes, okay. And then, 9.1 in September?

Yes. I'm only going to give you the Labor Ready [indiscernible], so it's kind of a same store sales number. That's what the 2.9% is also. The 2.9 was part of our same store sales number. So on a--our wage rate on a same store sales basis was 3.2%.

And I expect it's not going to make much of a difference, but with the 16 branches operating in the Gulf, and you are seeing a shortage of workers, do you expect that to change anything in the consolidated numbers?

You mean going forward?

Yes, at least in 4Q. I mean--.

--It's already built in, but it's a very difficult thing to estimate, and we expect it to be a net positive. That's the long-term rate construction. But it's just blended into the rest of our operations and into our forecast.

And we don't anticipate that it will impact these wage rate and bill rate numbers.

All right.

It's just too small.

Got you. Okay. That's what I thought. Thank you.

(Caller Instructions.) Your next question comes from Mark Marcon from Robert W. Baird.

Good morning. I was wondering, with regards to CLP, are you seeing--is it too early to see any sort of synergies from a sales perspective with your current Labor Ready branches? How is that progressing, or what are you seeing there?

That's a great question, Mark. When we look at our acquisition strategy of integrating these companies, we kind of have a three-phased approach that we take them through. And phase one is cultural integration. Obviously, during due diligence, we also do estimates of how we believe we will take a company through these three phases. So, yes, if we don't think we're going to make it through the cultural phase during integration, we make that assessment during due diligence. We have 100% confidence we're going to make it through that phase with CLP, but those phases take time.

And what happens in the cultural phase is, when management teams are meeting each other, and you're talking about the future, are we agreeing upon the strategies? And are we going to continue with the same compensation programs? And how are you going to budget me for 2006? And how are we holding each other accountable? And those are all cultural things that we're working on, and we're doing quite well.

Now, phase two in our acquisition integration strategy would involve policy changes, systems changes, procedural changes. But they start blending into the cultural. So once you are solid on your cultural, you can start working with each other and having common policies, common communication systems, common procedures and such. So we're just moving into that face where we're testing all of that. We're communicating with them. We're somewhat coming out of phase one, starting into phase two. As we move through that, we've got to talk about all of the systems that we're going to operate the companies under. And again, if your culture is set, you can move through that phase pretty good.

Phase three is the most exciting. And that is the integration of customers and workers. And so, we've got plans in place. We've been strategizing ever since due diligence the impact that this could have for us. We've met with CLP and we've got plans in place. We've got our teams talking to their teams. I'm talking about detailed operations levels. But it's all--nothing is rolled out yet. This is a phase where once we know that we've got those other two phases covered, we know we can make a huge impact here.

So it's tempting to run straight to this phase three in any acquisition you do. But we're confident that if we do, we'll make some mistakes and that we'll burn customer relationships, we will frustrate our sales teams and service teams, because we won't have the right systems in place. We won't have the right communication in place. We won't have the right--we won't have taught them what we expect.

So we--we're headed that direction. We're having the talks and we're moving. But the short answer is no, we haven't integrated branch level customers and workers yet. But we are surely moving in that direction as fast as we can, and we're still thrilled about it. We look at this as a very long-term strategy for us. And we're excited about doubling the branch count and doubling the size of each branch at CLP. We know that they're going to--we can do that faster with branch deports from Labor Ready, sharing its customers and sharing its workers.

So I think between this fall and into the spring we will have a lot of this worked out. And by the time we get into next summer, we'll be rocking and rolling.

That sounds like a really sound plan. In terms of the branch office opening plan for next year, I know we're not quite into next year as yet. But any preliminary thoughts? You mentioned that you're going to double CLP over the next couple of years. I'm assuming that you're going to open their branches in the geographic markets that they currently aren't in, but that you've got a strong presence. It sounds like you're going to pull back a little bit on the U.K. short-term. And then, I'm kind of wondering a little bit about what you expect to do on the Labor Ready front in terms of new branch openings.

Yes. We're working on that right now, Mark. And we'll have those decisions made and announced at the analyst day in November. So be sure to be there.

Okay. I'll see you there. I guess, the next question could get the same sort of response, but I'll ask anyway. How should we think about gross margins for next year? Should we just assume that if we take out the $1.8 million in terms of the accrual reversals, and then, just assume that if we strip that out that that's probably the stable gross margin, or how would you advise us to think about that?

Well, you're right. You'll probably get close to the same answer. We're going to give more specific details on this sector in a few weeks. But, in general, Mark, we've talked over the last couple of years that, yes, as our margins have expanded--our gross margins have expanded, we knew that they couldn't continue on the trend upward forever. Because sure, although there are competitive pressures, there's market conditions, and they have found somewhat of a stabilization period. I'm glad they stayed this--stabilized in excess of the 30.5% that we had predicted.

But the other things is we weren't quite sure what the CLP margins would do when we bought them. And we're very pleased that their margins are real close to our Labor Ready operating margins. The other impact, and it's hard to share until we get into explaining what we plan to do at Spartan, which hasn't been talked about a lot here today, is Spartan's margin go lower. And as we take on our strategy of expanding Spartan, that will pull our blended gross margin rate down. So until we actually share all the results that Joe just mentioned and branch count and--that's not just about 2006, but what do we feel over the next three years is what we kind of want to talk about, and the blended effect of these items.

Hopefully, that if the gross margin--if there is any decline in that, it's because of revenue is up and the dollars are flowing stronger, and those types of things. So earnings should be marching forward strongly. In the core business, though, let's come back and talk about that, because we can speak to that. We're very pleased with where we're at in the cycle as far as bill rate and pay rate. But as we just disclosed though, this quarter was the first quarter in several that the bill rate and pay rate matched closer, because we had been outpacing on the bill rate side for the pay rate side. And that's somewhat in--there were a couple of different questions here.

What's driving that? And general worker shortages--not shortages, but demand pressures on workers, causes that at various points in the cycle. And we knew that the last two or three years we were enjoying stronger demand for workers and a great supply. We still have a great supply, so don't read me wrong here. But there are--the pocket shortages are a little stronger, namely due to the great results we're seeing out of the State of Florida, and now, out of the Gulf States.

There are other short--or pockets that--there are wage pressures. But they're not out of control. They are not--we're talking about 10 to 20 basis counts here or there. We have stabilized the trend. So when I--when we disclose here that the bill rate and pay rate didn't balance, and actually, the pay rates went up 20 or 30 basis points more than the bill rate this quarter, those trends stabilized six or eight weeks ago. They kind of crossed, they stabilized, and they have actually turned back the other way the last two or three weeks.

So it's not that that's out of control. We're very much on top of it. We understand how to run that portion of our business. We've got great systems right at the branch level where that transaction takes place to report to those people. Before they agree to the customer, they know what that gross margin is going to be. And we pay them based on the bottom line. And they also know what that does to their bonus. And so, it's a great feedback system, it's great training, and that's holding our expectations high. We are not worried about that trend.

Yes. I've been to your branches, and I know you've got probably the best stability of anybody to control that pay/bill spread. With regards to what you are seeing in October, can you give us any commentary there, or should we assume that kind of the 7% same branch revenue growth that's implicit in your revenue guidance is indicative of what you are seeing in October?

Yes. It's only a couple of weeks. And I think you just have to go with the 7% at this point. And I mentioned that it's volatile from month-to-month. And if I gave you--started giving you weekly revenue, it would even be more volatile. So I would go with that 7% for now and let's see how the quarter comes together. Yes.

Okay. But you haven't seen any sign of a slowdown or anything like that?

You know us well enough. We would throw that into our guidance [indiscernible].

Right. Yes. Okay, great. And then, with regards to CLP, any signs of--are the worker shortages more acute there, or what are you seeing from that perspective?

On the CLP side, Mark, it's a different model. It's a recruiting model.

Right.

And so, if they find the worker, they can definitely fill the job, where Labor Ready is more of a sales model. We sell the--if we get the sale, we can find the worker. So that's just the nature of their business, as well as it is in skilled staffing.

I'm just wondering if they've decided if anything has changed appreciably over the last six months, nine months, in terms of availability of skilled trades people?

Right. They're not filling less orders. Obviously, we've disclosed here that their year-over-year growth rates are still pretty strong. Another way to ask that question that I will answer is, could their revenue be higher? And that answer is yes, because that's what Joe came back to. If they could recruit more, they could sell more right now. And so, they are limited on their sales growth by how fast they can recruit. But they've got great plans in place. They've got wonderful people and recruiters in those offices. They are not shrinking year-over-year. They would like to be growing faster and they are working at it. And I think we can put as many people to work as they can recruit. So--.

Great. Thank you.

(Caller Instructions.) At this time, there are no further questions. I would now like to turn the call back over to Joe Sambataro.

All right. Well, thank you, everyone. We appreciate you taking the time to celebrate our results with us. And we look forward to seeing you in New York on November 16, as we mentioned. And have a great day. Thank you.

This concludes today's conference. You may now disconnect.