TrueBlue Inc (TBI) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Labor Ready fourth quarter 2005 earnings conference call. Today's call is being recorded. Joining us today is Labor Ready CEO Joe Sambataro, President Steve Cooper, and CFO Derreck Gafford. They will discuss Labor Ready's fourth quarter earnings results which were announced yesterday. If you have not received a copy of this announcement please contact Lisa [Latrelle] at 1-800-610-8920, extension 8206, and a copy will be faxed to you. At this time, I would like to hand over the call to Ms. Stacey Burke for the reading of the Safe Harbor. Please go ahead, Ms Burke.

Here with you today is Labor Ready CEO Joe Sambataro, President Steve Cooper, and Chief Financial Officer Derrek Gafford. They will be discussing Labor Ready's 2005 fourth 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 www.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-Q and 10-K. I will now turn the call over to Joe Sambataro.

Thank you, Stacey. Good morning, everyone. Let me say from the offset that we are very pleased with the record results we announced yesterday which mark another solid performance for Labor Ready.

Revenue for the year was 1.2 billion, up 18% from a year earlier. Net income improved 71% to 62 million, or $1.18 per diluted share. In 2005, we relentlessly focused on increasing sales and improving gross margins while also continuing to pursue opportunities in new markets. We also added CLP Resources to Labor Ready's family of brands. Our record results, a 71% increase in net income once again demonstrates the power our great business model and the ability of our employees to deliver tremendous shareholder value. We will provide a more detailed review of our results in a minute. I wanted to take another moment to speak to our strategies and our ability to sustain our growth.

We see great strength in our core strategies to continue to grow revenue and profitability, expand into new markets, and diverse our services and brands. Our results for 2005 reflect solid revenue growth and gross margins along with industry-leading reductions in Workers' Compensation costs. Safety remains a priority at Labor Ready and we continue to make significant progress on our safety and risk management programs which allowed to us reduce overall Workers' Compensation expense. Most important, we have as one of our eight values the value of respect. We feel strongly that the highest form of respect is to bring our temporary employees home safely.

Our vision is to be the dominant provider of on demand staffing and use our strategies to achieve that goal. Last year, we took another step towards diversifying our service offering by acquiring CLP Resources, a leading provider of skilled tradespeople to contractors and large facilities. In CLP Resources we see a partner that complements our service of offering on demand labor with the ability to provide additional service to Labor Ready's existing customers, increase our customer base and position us to increase our market share. We have no doubt that CLP Resources is the right partner to help ensure our abilities to sustain growth and deliver shareholder value.

It's been another great year for Labor Ready. We put almost 600,000 people to work and helped small and mid-sized businesses find a flexible, on-demand and dependable temporary labor. That demand exists across industries and across the country. The labor force is there. But it's hard to manage. We organize it in a way that puts the power of low-cost recruiting, screening and hiring, and a management of labor costs in the hands of the business owner. I'm extremely proud of the company's excellent performance and our ability to deliver record revenue and net income results.

Before I hand over the call to Steve, I would like to add that Labor Ready's CFO, Derrek Gafford, joins us on the call today. Derrek was promoted to CFO in December. He has served as Labor Ready's Vice President of Finance and Accounting since September 2004 and first joined Labor Ready in 2002 as Vice President and Treasurer. I know many of have you already spoken to or met Derrek. If you have not, he will be traveling to meet analysts and investors with both me and Steve throughout the year. Before he offers further detail on our 2005 financial results, I would like to turn the call over to Labor Ready President, Steve Cooper, for highlights on the fourth quarter.

Thank you, Joe. You know, the Labor Ready story is straightforward. It's all about sustained earnings growth.

Net income per share improved to $0.28 a share as compared to $0.20 a year ago. And we came in $0.02 ahead of our earlier estimates. The upside came from better-than-expected revenues, gross margins, and interest income. Partly offset by higher-than-expected SG&A. Derrek will give more details on the gross margins and SG&A here in a moment.

We remain confident that as we grow same branch revenue, we have the opportunity for substantial earnings growth. This leverage on same branch revenue has been producing over 3% of earnings growth for every 1% of same branch revenue growth. We believe this will continue.

I'm going to talk about that leverage model in relation to three different reporting periods. Our fourth quarter that just ended, our estimate for 2006 as a whole, and our estimate for the first quarter of 2006. First, in Q4 2005, we grew net income 56% on same branch revenue growth of 10%. Our leverage was stronger than expected primarily related to lower interest expense and to stronger gross margins. The second period I want to discuss is 2006 as a whole. We are estimating 18% earnings growth on 8% same branch revenue growth. Our leverage isn't showing up as strong as we would -- as would be expected for two primary reasons. One, work comp reserve adjustments in gross margins are not being estimated to be as high as they were in 2005. And, two, the implementation of FAS 123R share-based payments is creating an additional expense we did not have a year ago.

The third period I want to discuss is Q1 of '06. We are estimating 10% net income growth on same branch revenue growth of 9%. With our normal earnings leverage, we would expect income to grow over 30% in Q1 to obtain the operating leverage we have discussed. There are a couple things impacting this lower-than-expected leverage for Q1. First, we purchased CLP Resources at the end of May in 2005. Although CLP produced net income growth for in us each of the first seven months we owned them, the first few months of each year are seasonally the toughest and we expect those operations will produce a loss during the first quarter. And, two, the impact of implementing FAS 123R will cause net income growth to be lower in the first quarter compared to a year ago. Again, it is our expectation and we are pleased that our normal operating leverage from same branch revenue is continuing to produce sustained earnings growth.

Now I want to discuss our revenue results for the fourth quarter along with our expectations for 2006. The increase in revenue during Q4 came from the following categories: one, branches opened one year or longer increased 9.6%. Two, branches opened less than one year net of those closed during the year contributed 30 basis points. Three, the CLP Resources operation that we acquired in May 2005 contributed 12.9% growth. And, four, other items such as currency adjustments and the shift in the holidays this year versus a year ago accounted for the remaining difference of 1.1%.

Our monthly trends that made up the same branch revenue growth of 9.6% for the quarter were as follows. October grew at 6.9%. November grew at 11%. And December at 11%.

January same branch revenue growth rates have been in line with the trends we finished the fourth quarter with. However, as it is still early in the quarter, we are estimating Q1 same branch revenue growth rates to be approximately 9%. Our revenue growth in Q4 was distributed pretty evenly throughout our operations. With all of our North American areas delivering sales growth during the quarter.

We saw particularly strong growth in our Texas, Louisiana, and other Gulf state markets where hurricane relief and rebuilding efforts contributed approximately 1% of our overall sales growth for the quarter. Our teams in those markets continue to do an outstanding job in helping our customers find the right amount of workers every day to rebuild those communities. Our UK operation saw improving trends during the quarter and we are pleased with how the UK is trending currently. As part of same branch revenue growth, price increases accounted for 4.1% of our growth in Q4. A portion of our bill rate growth is attributable to minimum wage increases which were put in place in 2005. Florida, Labor Ready's's second largest state in terms of sales volume, saw its minimum wage increase 19% in 2005 from $5.15 to $6.15. That occurred in May of 2005. Price increases in Florida alone contributed nearly 1% of our sales growth in Q4. Other significant states like Washington, Illinois, New Jersey, and New York also saw minimum wage increases in 2005.

Minimum wage increases give us a chance to increase our prices to our customers and they are the easiest type of cost adjustment to pass on. While these wage hikes benefited us in terms of sales growth in 2005, we don't expect to see the same level of price increases in 2006.

Given that we are all about producing sustained earnings growth, I would like to report we continue to work on three important areas to sustain our growth. Customers, employees, and our temporary workers. The first area of sustained growth is growing our customers. We are continuing to focus on building first class sales teams in certain markets and provide employees in all of our markets with proper sales training. Also in the area of customers, we are continuing to focus on strategic ways to serve our current customers with new services or brands and strategic ways to enter into new markets. Over the past 18 months, we acquired Spartan Staffing and CLP Resources which both acquisitions have provided us with new avenues to sustain our earnings growth. We are planning to open approximately 40 new branches in 2006 in new markets. Opening in new markets is giving us the opportunity to expand market share and better serve customers in those new markets.

The second area of sustained growth is our employees. We continue to implement better ways to attract, train and retain our valuable employees that are responsible for providing customers with the best service possible. This focus is making a difference as the employee tenure in our company is at an all-time high.

The third area of sustained growth is our temporary workers. We value the health and welfare of our temporary workers. We are continuingly looking for ways to improve our safety trends with our worker base. This is paying off in our lower Workers' Compensation costs. We have reported each quarter. We are also focused on increase in the tenure of our temporary workers to increase the length of time our workers stay with us and remains available to work. We know that with a strong, healthy workforce, our earnings growth can be sustained. We believe we have the proper strategies in place to effectively focus on these three areas of customers, employees and temporary workers that can drive our sustained earnings growth.

At this time, I'm going to introduce Derrek Gafford our new CFO. He joined the company four years ago and has worked closely with the entire executive team and operations in implementing several of the strategies that are currently driving our better-than-expected earnings growth. Derrek.

Thanks, Steve. Good morning.

Standard gross margins and continued leverage in SG&A expenses provided substantial contributions to another year of outstanding bottom line results for the company. While we are pleased with our results we are equally confident in the business model's ability to provide sustainable growth in the future. Our gross profit in Q4 of 2005 expanded 120 basis points over the same quarter ago. This improvement was primarily the result of lower work comp expense. The majority of this reduction was due to our actuary decreasing reserves established in prior periods. We are very pleased with our safety and risk management investments that have continued to push this cost down. We estimate gross profit for 2006 of 30.8 to 31.2%.

Our gross profit guidance for 2006 is approximately 70 basis points lower than our 2005 gross profit of 31.7%. During 2005, we experienced several reductions to work comp reserves from prior periods. We cannot estimate if or to what amount these reductions will continue in the future. Our gross profit guidance includes an estimate for work comp expense of 6.6 to 7% of revenue. Without a doubt, our business model continues to produce strong leverage against increasing same branch revenue and we expect this to continue into 2006. SG&A as a percentage of revenue for 2005 was 23.2%. Absent certain legal events during the fourth quarter, and adjustments we chose to make during 2005, SG&A would have been 70 basis points lower or 22.5% for the year.

I'm now going to provide some additional color around the two categories of costs that increased our SG&A by 70 basis points for the year. First, we reached satisfactory conclusions on certain legal matters during Q4 this year from events occurring in prior years. These actions increased SG&A as a percentage of revenue by 30 basis points for the year. Second, the remaining 40 basis points was the result of four important strategies we chose to implement during 2005. First, the acquisition of CLP. The higher cost structure at CLP resulted in higher blended SG&A percentage for the company. Second, accident prevention programs. During 2005 we continued our aggressive efforts to reduce the number of work related injuries in our business. These investments have provided substantial returns by increasing gross profit. Third, bonus programs and sales teams. We continued our bonus program tied to income from operations and made new investments in sales teams in selected markets. Fourth, equity compensation plans.

In anticipation of FAS 123R we switched the majority of our equity awards from stock options to restricted stock at the beginning of 2005. This change resulted in an expense during 2005 of approximately $0.02 per diluted share. For 2006, we estimate an incremental $0.06 of expense per diluted share for the year and an incremental $0.02 of expense per diluted share for the first quarter of 2006. Both of these in comparison with the same period a year ago. We are confident our work in these four areas will continue to provide sustainable growth for our shareholders in the future.

For 2006 we estimate SG&A as a percentage of revenue to be 22.5 to 22.6%. A decrease from 2005 of about 60 to 70 basis points. While we've had additional legal expense in Q4 2005, resulting in approximately 30 basis points of expense for the year, this should not reoccur. We also estimate incremental costs related to FAS 123R in 2006 of approximately 40 basis points. It's clear, we have strong leverage in our operating margins due to the growth in same branch revenue. We are also confident in the ability of our business to provide sustainable future growth for our shareholders. We expect 2006 net income as a percentage of revenue to be approximately 5.3% compared to 5% for the 2005 year. Net income per diluted share for 2006 is estimated to be $1.30 to $1.35, based on estimated fully diluted shares of 54.5 million.

For the first quarter, we estimate net income per diluted share to be approximately $.018 to $0.19. Remember, our diluted earnings per share guidance includes the impact of both stock options and restricted stock. Our estimated income tax rate for 2006, is about 38.6%. Since the work opportunity tax credit expired at the end of 2005, we have an increased our 2006 estimated tax rate by approximately 50 basis points in comparison with our 2005 tax rate of 38.1%. While we're hopeful Congress will renew the tax credit during 2006, we cannot predict it will be renewed at this time.

We finish the year with the strongest balance sheet in the company's history including about 176 million of cash and no debt with the exception of about two million in capitalized leases. Our strong balance sheet provides us with significant flexibility to react quickly to opportunities in the marketplace. We remain excited about the opportunity to expand into other complementary lines of business, grow our investment in our recent addition of brands and invest in leveraging our customer base among our brands. At this point we will open the call for questions.

Is the operator there?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mike Carney with Aperion.

Hey, good morning, everyone.

Hi, Mike.

Couple questions. On the CLP business, it looks like in the fourth quarter that sales were somewhere around $35 million, which would assume really strong growth again. And can I assume that most of that is -- I know there were I think three new branches but most of that is going to be same branch sales?

Yes, Mike. That's right. You hit that revenue number pretty close, and that's exactly right. We had a couple -- the three openings during '05. During '06 it will look a little bit different than that because we're going out there with a few more openings than we had in '05 for CLP. But their same branch revenue has been doing really well and they finished December their strongest month in the history of that company.

And then -- so in the first quarter, you're expecting them to lose $0.02, I believe you said, for you, if -- if the growth remained at that high level, is there a possibility that they would actually provide profit for you? Or are you assuming that that level -- that growth level will stay the same?

Well, it's much like we estimate the rest of our business. We always have a little bit of conservativeness in there because we don't just take one month and say that's the trend forever, although December was strong and we ended Q4 a strong month with CLP. There are a couple things there. One, it's seasonally slow, so you have to keep in mind that. The fixed cost structure in that business stays pretty solid. The amount of employees we have in each office doesn't change just because it's January or February. So --

Well, December is seasonally slow, too, right?

What's that?

Isn't December seasonally slow too?

Well, it's not as seasonally slow as January. We had a warm December and they had a great month. No, we're not reestimating those high growth rates so yes, there's a little upside there. But gosh, the $0.02 estimate we gave in losses is where we see it today. There is one other impact there and we're opening 12 offices this year in CLP. So that comes into play, also.

And then, Steve, can you -- I mean, is there a way to quantify the benefits from investments in the bonus and the sales programs and other stuff that you're doing at Labor Ready branches and the safety risk management? I mean, if you're spending at least several million dollars a year on that type of stuff, are you able to quantify that in terms of how much it's producing for your gross profit or your sales or whatever top line?

Yes. We don't really have anything that we can share with the outside. We obviously are watching it really close because it's specific markets of where we're at. It's -- there's nothing I can really share with you. You know us well enough that we're watching those costs, those investments, really close, making sure that we're getting the return on investment on that. We're not rolling some flash in the pan idea out company-wide. We're making sure that it returns as we go. So --

Okay. And then last question, it looks like there's a couple less Labor Ready branches that you're expecting to open. It's not material, but is there any reason for that?

[Inaudible] In November, we stated that we're going to open about 23, and I think our recent announcement said that it's about 18. We're still working on those other five. If we don't get the leases open by spring then we pull back because there's no reason to go out there and open one of our offices in August or September. So it's really just an estimate of when the leases -- we still want to go to those markets so that it's no signal that we don't have markets available. It's just the number of leases that we've got in place and the momentum that we have to get those offices open at this point.

Okay, thanks. Great job.

All right. Thanks, Mike.

Thanks, Mike.

Your next question comes from the line of Michael Morin with Merrill Lynch.

Yes, good morning. Couple of questions here. First, I was wondering if you could quantify for Q4 what -- how big the reversal, if any, was on the workers' comp provisions?

Yes. The reversal was about 170 basis points. But keep in mind, in the same quarter a year ago, the reversal was about 60 basis points. That was a pickup of about 120 basis points and the substantial driver of the gross profit increase of 120 basis points.

Okay. Now, the -- workers' comp does seem to be a bit of a theme that other companies have talked about, as well. And clearly you guys have done a great job in reducing the accident rate. We know that there's been some change to the legislation in California. Is that playing a role at all, given that we're hearing that this come out from other companies where perhaps they haven't been as focused as you have on the accident rate?

Yes. The legislation in California that took place, we experienced most of that benefit in 2004. That's when the law went into place. And so at that time, our actuaries adjusted our reserves. The primary result of the reversals that we've got going now are based on lower claim frequency.

Okay. And then second topic, construction exposure. I think you've taught that the analyst day that it's about 40% of your business is coming from construction. I was wondering if you could talk about some of the trends that you're seeing more recently within that segment, given some concerns about perhaps the housing market rolling over.

Yes, we're not -- we're not really seeing anything that's supporting those macro trends that are being reported. There's various reasons. Number one, a lot of those macro trends are being driven by larger construction companies that are building big tracts and have a lot of union labor or don't use a lot of temporary labor, or both that Labor Ready and at CLP our workers seem to be working on custom homes, remodels, things like that, when it comes into the residential area. You know, a very small -- in the CLP world, maybe 11% or so really is focused on residential. And most of that's on the custom home side. And then another factor driving it and the reason we wouldn't see it in the beginning is especially in the CLP world, we have unfilled work orders every day. We're recruiting as fast as we can in that business model. But we can't keep up with the demand. Now, we're still growing year-over-year the last six months CLP grew at -- in the 12 to 14% year-over-year on their own numbers. So they're growing really nice. But it's a recruiting game. And they're out there recruiting as fast as they can. They're doing a great job. But if there is a little bit of a pullback, we won't fill it because we have -- we have these unfilled work orders. So if there's just a month or two where it's a soft patch it's not going to show up on our numbers, Michael.

And on the commercial side within construction which I think is actually twice the size of your residential construction, are you seeing any strength there or perhaps acceleration of demand there?

I don't believe that we're probably seeing acceleration. It was a strong six months for us in our construction industries. And we have not seen any deceleration, but I wouldn't call it acceleration there.

Great. Thanks very much.

Your next question comes from the line of Jeff Silber with Harris Nesbitt.

Thanks. I just wanted to double-check on a couple of numbers. Steve, I think you said that the average billing rate increase was 4.1%, was that correct?

Yes, that's true, Jeff.

And how about in terms of the average wage rate increase in the quarter?

Let me grab that for you.

And while you're doing that let me ask my next question. I'm not sure how granular you were getting in your guidance, but if I remember correctly you said the hurricane benefited you at least in terms of added work about 1% of the growth in the quarter. Are you incorporating that in your guidance for the first quarter and for the remainder of '06, as well?

Definitely in the remainder of '06. We just came off of 10% same-store sales growth and we're only really guiding 2006 at 8%. And there were two main drivers to come down 2%. One was the hurricane. And a lot of our work on that hurricane is clean-up. Now, what we're not estimating is the construction that comes behind the clean-up. So in our 8% number isn't a pickup from construction that could come. It's just saying the clean-up may slow down. The other 1% was minimum wage increases that we don't believe will be reoccuring so as we move our same-store sales estimate from 10 to 8, it's just those two factors. Now, in the first quarter, we've had a strong January. And what I've done is we've just adjusted the rest of Q1 to reflect our thoughts about q -- or '06 as a whole. And that's how we get to 9% growth. Again we don't like to just take one three or four-week period and blow it up and say all 52 weeks are going to look like that. So we're somewhat conservative. We've had a great month, and, yes, there's some upside here.

Okay. If we can just circle back to the wage rate increase?

It was 3.9%.

3.9. Great. One more thing. In terms of cash flow, I mean, obviously your company's been throwing off a lot of cash. In your board meetings or in your internal meetings, what kinds of things are you discussing in terms of what you may do with that cash going forward.

Hi, Jeff. We talk about it at every board meeting. And our focus right now is providing a 20% return on equity that we've done. And so our -- currently our focus is implementing strategies that can put that cash to use. And then if at some point we can't -- we have more than enough to implement our strategies going forward, then we talk about dividends and we talk about share repurchase. So, but at this point in time there's none planned.

Okay. And in past couple years we've seen a pretty decent acquisition each year. I'm not asking if you're planning on anything in '07 but if you were to look for another company, what type of acquisition would it be?

Someone once asked me if you found another CLP of that size and it fit within your strategies, would you buy them, given the right evaluation? And the answer would be of course. Now, we have the cash to do that. Which is a good thing. We've talked about our one-up strategy and we're not interested in getting into the high-end stuff like the -- for us high-end is clerical or certainly not professional. But we still look at opportunities to leverage our customer base, leverage our worker base that we have built over the years at Labor Ready so it could be in a number of areas but it's only going to be that one notch up from where we're at. It could be at an expanded light industrial site if we see the right match with our customer base. It could be in the other area that's just one skill setup, not significantly though.

Okay. Great. And let me add my congratulations, as well.

Thanks, Jeff.

Your next question comes from the line of Craig Peckham with Jefferies & Company.

Good morning, everybody.

Hi, Craig.

I wanted to see if you could elaborate a bit on the specific legal issues that were resolved as part of the SG&A pickup in the quarter. I think at the end of last quarter, if I'm not mistaken, there was a reserve of about $6.5 million.

Clarify that question on that 6.5 million. What you were talking about.

I think at the end of last quarter there was a legal reserve in the amount of $6.5 million.

Okay. All right.

And I'm just trying to match that up with the additional expense that we're seeing in the income statement this quarter and then I'd be interested in what exactly is happening there, what the legal issues are that are being resolved.

Yes. Well we're not going to speak to the specific cases of where we spent that money and such that has to do with our strategies of working on those cases and how we resolve them. The material cases are all disclosed in our SEC filings. And you can see what's there. We have made the statement that this additional reserve that we brought on that Derreck talked about the size of was related to a few cases that one in particular was the largest part of it. And they all were for prior period events. And so they were all putting more money towards those reserves. We made some statements in our last SEC filing that we might be making some settlements on some of these cases and we did and we're really pleased that we've got some things behind us. They were prior year events. We're not carrying that over into '06 and we're really excited about that. And we're not excited that we had to have this hit in Q4, but we're excited about the go-forward nature and we don't believe there is a carry forward residual from those cases that they're going to show up other places or cost us more later. That's the nice part about this. It's not just adding to your reserves. We actually brought finality to some cases.

Okay, good. I just wanted to understand that those were items that had been settled.

Yes, they're settled and they were items that were also items that were previously disclosed, so it wasn't a new case that came up and it actually brings closure to some cases. So it's good news even though the amount wasn't comfortable.

Okay. A follow-up question. I was interested to pursue the strategies that you have in mind for increasing your worker tenure. How far along are we in that process, and what, if any, kind of specifics can you give us on that strategy?

Well, we have been very focused on that. We've had a large team work on that relentlessly the last 90 days. It's an item that came up late in the year that we felt if we could have the best -- the most talented workforce out there and recognize how it incredibly important that tenure is to that group, that we could save some money in recruiting and what it takes. You know, you put some costs around what it takes to bring one of these individuals in the door, and we need a better return on that. Customers are happier if we have larger tenure. The workers are happier. They're safer. They're so many strategic reasons why increasing tenure of your worker base makes sense. So what are we specifically doing really has to do with a mindset to start with that it matters. And we've had so many workers available to us over the years that we haven't always focused on this so when I throw that out I'm glad your ears caught it, because it is a new area for us to talk about. I think I would summarize it by just saying to our shareholder base, we know that's an important asset to us. And building up a strength in that group, we know that's an asset that will provide us sustained earnings growth going forward. There will be more to come on that, Craig.

Okay. Thanks. Welcome aboard, Derrek.

Thank you.

Your next question comes from the line of Jim Janesky with Ryan Beck & Company.

Yes, good morning. A couple of questions. Kind of drilling down into organic growth a little bit more, can you let us know what particular areas of strength there was, for example, outside of construction, how did light industrial do, how did hospitality do? And any other vertical that might stand out.

You know, Jim, we've talked a lot about this in the past and it's hard for to us give that kind of granular conversation. Mainly because the industries tie to our geographies. There are some geographies that constructions are strength and some geographies that manufacturing's our strength. I think the best news I can give you is the statement that I've already made and that was that our sales growth came from all areas. We didn't have any weakness. Where as in prior quarters I always disclosed to you that there were certain geographies or areas or regions of our country that were struggling. And Q4 represented across the board strength in all of our North American areas. And therefore, across the board industries were impacted. Now, anything further granular in that I can't give you. I just -- it would be too misleading to go there. It's not that I'm holding back on you.

Okay. Sure. And what about the UK? What type of -- I mean, is that turned positive single digits, upper single digits in terms of growth, or where are we? And how do you think -- what type of momentum have you developed going into '06?

I think there's some very exciting things going on in the UK. First was recognition that there was definitely a soft patch in that economy over there last year and as we -- it's always easier to see those things in a rear view mirror and to know that we lost a handful of large accounts at the beginning of Q2. And understanding why we lost those gets to be easier as we hear other staffing companies were losing large accounts, too, and they were struggling. Large accounts were going down. They were tightening up their operation. They were either putting pressure on gross margins on the selling price -- the bill rate, there were various reasons in things that were going on in the United Kingdom that we now recognize. Now, the nice part is we've already responded and that is that we've retightened our belt. We understand the on-demand business very well better than the other staffing industries. And we know that we can meet that need and is proven here in the United States if we stay focused on on-demand labor there is always a need and we don't have to take big blows when there are soft patches in the economy. We weren't as prepared in the United Kingdom as we needed to be, we'll admit that now. Now, the recovering from that is we recovered very quickly. We sent in our special forces to get over there and teach those people, make sure that we were selling on-demand labor and that's where our success has come from in Q4 is the amount of effort and sales training and focus that we've put into place on hunting down and finding new smaller customers and that's our bread and butter, what we serve. So the sales growth doesn't come back rapidly. He when you lose a handful of very large accounts and our strategy is to focus on small accounts it takes a while to get that sales growth moving. But I'm really giving you a ceiling off of fundamentals how the sales team looks, what the customer service teams look like what their attitudes are, their basic understanding. Now, my enthusiasm comes here in January, we're getting really close to just being flat with the prior year. And we really didn't lose those large accounts until we got into April. So I judge that as being a very successful. We get into Q2 and 3 when we get past the comps when we had those large accounts in there, and that's the great reports I'll be able to give you.

Okay. Fair enough. Now, shifting into the Gulf Coast region and Florida, the so-called hurricane-affected areas, is the reason you're not assuming the follow-on construction growth in those markets, which you seem to have always -- you've been able to grow after prior hurricanes, are you doing that because it is hard to find people and if it is hard to find people, what are you folks doing to try to address that issue of the supply of labor?

Well, it's actually getting easier to find people. The big rush of when -- when labor got so tight for about 60 days has relaxed a bit. And temporary workers are out looking for work again and customers are turning back to the traditional source of using us rather than just picking up wherever and it was just a mad dash for 60 days. We're through the mad dash days. And things have stabilized in those concerns. You know, I was just in New Orleans last week, and why aren't we estimating what that growth period looks like is -- you only have to drive around down there and get a feeling what's going on is there is a certain amount of clean-up that's gone on but rebuilding really is not under way yet.

Sure.

It's just not there. So when and how much and when will that impact us, I'm just not comfortable telling you exactly when and how yet. As soon as I know, I'll let you know.

Okay. Makes sense.

But right now, it's -- we can estimate the clean-up side of it. We know how those offices are performing. And that really -- one thing too, you said what you do have experience because you've had other hurricanes you've experienced. That was really over in Florida. And those Florida teams learned how to get past clean-up and support contractors that are rebuilding putting new roofs on and doing that kind of work. And your customer base does grow as we've talked about in the past, you meet -- you have to develop these relationships now that we've supported them in clean-up, we've got to turn around and support them in redevelopment and our Florida teams have always done an outstanding job of getting all stages of that disaster taken care of. Our teams in the Gulf states -- and I'm confident they'll do as equally as good a job, but it's new territory for us.

Okay.

We handled the clean-up awesome. And we're just going to watch and do everything that you said, be prepared and recruit and have the people in place to support the rebuilding. But right now, I just can't estimate it.

Okay. Fair enough. And just a final quick question. Still planning to open the majority if not all of the CLP offices in Texas and Louisiana, or at least the Gulf Coast region? Is that correct?

Yes. We shared a little bit in a map in our analyst day presentation in November and we're still on plan with where those estimated openings were in November, that that's where we're still headed.

And that included, Craig, the State of Florida.

Oh, that's correct, right. Okay. All right, thank you.

Your next question comes from the line of Clint Fendley with Wachovia Securities.

Good morning, everyone. I wondered if you could comment on your workmens' comp. And what your timing was for future adjustments there.

Well, for -- if I understand your question right, Clint, you're asking about what the future looks like for adjustments coming down the pipe. And we just can't really estimate those. The best that we can do is estimate and incorporate our current run rate. We're continuing to focus aggressively on the safety programs. We haven't left off taking our foot off the pedal yet. But our actuary comes in every quarter, and he gives us his best estimate. And that's what we record to. We've been fortunate to get some four, five, six consecutive quarters of credits coming back. But we can't estimate that and haven't estimated that into our guidance.

Okay. Fair enough. And Derrek, what is your expectation for the interest income line item in '06?

Yes. We've been investing the majority of our cash in short-term investments. The yield curve's really flat right now and it's providing some good yields without risk. So I would estimate that total will probably be somewhere around 7 to $8 million for next year. And that's in tax-exempt investments.

Okay. And I guess switching gears here then to the non-residential area of your business there, how much of your work, if any, is comprised of public sector dollars versus private businesses?

We generally don't work for the government agency. We work for contractors who might have contracts with the government, Clint, so we dispatch our workers. It's not always obvious to us if it's going to be on a public project or not. So we're not directly contracting with public agencies. But I'm sure some part of it -- there is a category called prevailing wage, and as a whole it's not that material.

Okay. Thank you.

Your next question comes from the line of Jim Wilson with JMP Securities.

Thanks. Most of my questions have been answered. But I guess just two quick things. On the workers' comp setups you've been talking about the expense. Is there -- how do you approach with your customers changing or passing through I guess any real premium adjustments you see? How do you practice that from a revenue standpoint with your customers? And then the second thing which I assume is the case but I was just going to ask it is with CLP and the branch openings you have, I assume that kind of revenue growth rate that you saw in Q4 is just like with the Labor Ready side, is much more conservatively forecast -- forecasted for '06? And if so, at what level?

I'll talk about the workers' comp side and Steve can talk about CLP. There are three types of increases we pass on to our customers, Jim. Steve's talked about minimum wage. That's the easiest of our customers who have workers who have employees who are at or near minimum wage. So you go to them say hey, minimum wage went up we need to increase the price. Yes, no problem. Second is unemployment tax. In our past, I'm not sure exactly what year it was, 2002 I think, where there was some significant unemployment tax increases due to various states that too is a pretty easy one to pass through. Remember, too, that all of our -- we don't really have contracts. We don't have long term contracts with our customers. We have [inaudible] dispatches maybe a week and we won't raise the rate in the middle of a project but we don't have to say [inaudible] we can't renegotiate the rate so a year from now or nine months from now, we do it within a few days and all of our computers are controlled from corporate and we throw in these new rates the day they're effective and as soon as the manager comes to work and he inputs a new customer in comes the new rates. The third is Workers' Comp. And in the past when it was going up, that's the more difficult one to put through. That's really your question. Because sometimes it's a timing issue. For us, and we look at worker comp increase, we want to be ahead of the curve. We want to be sure that we're anticipating an increase and to that extent, it's not -- it's not about expense. It's about cash. You can never go back and say hey, our workers' comp was higher than we thought. And so you owe us more money. That doesn't happen. So cash it's real business here. And so we might be ahead of the curve. You know, we might be talking about it in January but they won't see their increase until an anniversary date on a policy or state program comes through in June. And so there it's just a matter of discussion and it's our people's -- that's what operators do, manage that. They've always done a good job. Fortunately, last couple years, it's been the opposite. Workers' comp has been going down due to respecting our workers and really putting an emphasis on safety and just a great team effort out there between Derrek's group and corporate and the operators in the field. It doesn't quite work the same way. You don't run out to your customer and say hey guess what, workers' comp is going down. I think I'll lower your rate. As long as they're happy you just keep working with them. But if at some point we need to be more competitive, well, there is a place to work with that. So that's how it works if that helps you.

Yes. That makes sense.

Okay.

Yes. Your question about the CLP trends versus projections, is that kind of where you're at?

Yes.

Yes, we handle that the same way. We know where they're trending currently and we know where we want them to go and we -- but we don't take one month at CLP and project it out 12, either. We look back at where they've been the last six months and where we think the industry is going and what -- where they're at and, yes, we have some strong increases projected in for them but they're not at the rate where they grew in December. December was the record month. So --

And there are 12 new offices opening. Did you factor in a modest additional amount for them?

For SG&A?

No, sorry, for revenue --

For revenue, yes. We've got some trend there. They did open a handful of offices and so we have a little bit of track record there and we start bringing the revenue on. In our Labor Ready world, about 1.6% of our growth this year came from new openings and CLP, we're estimating might be in that same category. There is a little bit different curve that happens in their business versus ours the way they ramp up. An on demand office can hit the ground running pretty fast because the workers are available so readily and you can get out there and make some big sales and they ramp up fast and then they stabilize and then you grow it at a 10% rate from there. CLP it might take us a little bit longer to get that going because we've got to do some recruiting while we're selling and you're balancing that effort of recruiting and selling. But once you get your base moving then you really get going because you grab a couple customers and you get some workers available, some skilled tradespeople available, and you build up your pool of people and then that really -- it takes off later. So the growth curve the -- ramp-up curves's a little bit different, but we go down the road and we kind of analyzed this on the first year of three years of operations. And on the first three years of operations if you looked at our analyst day presentation that we gave in November, we disclosed all of this pretty well on the ramp-up of Labor Ready versus the ramp-up of CLP.

All right. Great. Thanks.

Okay. Thanks.

Thanks, Jim.

Your next question comes from the line of [Kurt Molnar] with RCM.

Good morning. Good morning, Kurt. I think you're planning to open 40 branches next year? How many do you think you're going to close?

We -- it's a handful usually. We don't really go into it. It's more likely than not, Kurt, we'll open our 40 and then we'll open probably a few unexpected. We'll close a few unexpected. We manage what we call the watch list here and we manage it pretty carefully. And if we don't see a branch gaining traction, just a bad location or didn't work out we're not going to sit around trying to make it work. We'll just open something that we know is going to ramp up quickly. So I think from your perspective, 40 is a good number and if you view it as a net, you're probably be reasonable.

And in terms of the first year branch revenues versus a mature branch revenues, what's the percentage?

Percentage of what, Kurt?

So a branch has mature revenues of a certain amount. Typically, what percent of those mature revenues does it achieve in year one, it's first year of operation. 50%? 70%?

Yes. I think the best way to look at this, Kurt, is if you look at our IR presentation, we have two of them filed. One is we gave what's called our analyst day presentation. That was filed in November. And then we have an ongoing quarterly presentation. We have two ramp-up tables that we show there. The one in -- at the analyst day shows all three brands. What we expect in year one, year two, year three of revenue per branch. In our normal ongoing quarterly presentation, we have a combined table that shows where we've been the last three years. And it shows all ages going up to age 10. So you can take a look at that graph and that will answer your question there of where do we get in year one, where do we get in year two, and what do we expect out there in year 10.

Thanks. I was unaware of that.

If you have any questions after you look at it just call Derreck or Steve.

Great. And these would open in the first half of the year, is that right?

Yes.

Thank you very much.

You're welcome.

Your next question comes from the line of [Jeff Mueller] with R.W. Baird.

Good morning, filling in for Mark Marcon. Sounds like SG&A leverage has been masked a bit both this quarter and in your 2006 guidance. As you anniversary your falloff of the retroactive workers' comp adjustments and the SFAS123R expense, how you would anticipate the SG&A leverage story to play out?

Well, we anticipate a couple of things here. We've talked about 30 extra basis points in legal costs for 2005 and that will be rolling off. We're not expecting that back in 2006. We've also talked about the extra 40 basis points in 2006 due to FAS 123R. Really what we're looking at is 70 basis points of leverage going forward into 2006. So where we're finishing it at 23 2, we're projecting to come in around 22.5 so about 70 basis points of leverage is what we're looking at.

And then as that 40 bips falls off from the 123R and then what was the effect of the retroactive workers' comp adjustments in 2005?

It's about 70 basis points.

That's in gross profit though.

Right.

Okay.

Not in SG&A.

All right. That's my only question. Good quarter, guys.

All right, thanks, Jeff.

Your next question comes from the line of Mike Carney with Aperion.

Hey, Mike.

Hey, sorry just a couple more pitches. Joe, you said international provider of temporary employees in the press release. I assume I can't, but can I read anything into that other than being in the UK and Canada?

No.

All right.

No, it's just reference to UK, Canada, and Puerto Rico.

Right. Okay. Then also on the gross margin of 32.6, obviously that's the biggest you've had since the '90s. And obviously, most of that's in the worker comp adjustment. Is there -- can I assume that actuaries cannot use any qualitative type data to lower the overall reserve or increase it just because in the past they've looked at it and they're like well, will we continue to get it wrong to the downside or we continue to get it wrong on the upside and so this quarter, we're going to try to make up for it?

The actuaries, they consider qualitative data but very little of it goes into their estimate. So what actuaries want to see is they want to see results. And so when we implemented our safety programs we felt very confident they were going to drive accident rates down and actuaries said well, we'll see. And then as accident rates came down the actuary said, okay, well your accident rates are coming down but we want to make sure your costs really come out. So they want to make sure that we weren't just cutting out band-aid claims and that's -- they've watched those costs come down, they've reduced the reserve. So the answer to your question, Mike, is it's much more focused on quantitative data.

Well, I guess I'm just wondering if after being I guess wrong to one side or the other for a long -- for eight or nine quarters, is there a possibility that they say okay, we don't want to be wrong again, so we're going to go a little bit more or a little less conservative than we have been in the past so that it looks like this quarter they may be going forward now there won't be -- I mean -- do you understand what I'm --

Yes. Two things. From our actuaries' perspective, they think that they've always got it right and they're giving their best estimate every quarter.

Okay.

They're never wrong. (Laughter)

And number 2, it's not uncommon to see bigger adjustments in the fourth quarter. While we get an actuary adjustment each quarter, at the end of the year, that's when they do their real big bang review and it's a tighter review.

Okay. And Derrek, did you -- what was the assumption that you used, did you say, for the '06 tax rate?

About 38.6%.

Okay. And that would assume the worker credit benefit, right?

No. That's assuming that the -- we finished 2005 at 38.1. And we're giving you guidance of about 38.6. That 50 basis points pickup is assuming that the work opportunity tax credit is not reviewed.

Right. I thought that's bigger than 50 basis points.

Not right now it's not. At different points in time when it first started we first started with it, the impact may have been larger than that.

Okay.

That's about where it's at now.

All right. Thanks a lot.

Thanks, Mike.

Your next question comes from the line of Joyce Capuano with Artemis Investment Management.

Hi. I was wondering if you could adjust supply of labor again. You talked about the Gulf Coast and I was hoping you could speak more broadly. I think at the time of the analyst meeting you talked about pocket shortages and I was wondering if you could update us there.

Yes, great. Hi, Joyce. It still remains a pocket shortage thing. And I did give you a little bit of color that we're feeling better about the Gulf states. There's beginning to be more workers available again and just again I was down there last week and we see our offices filling up again. And they're leaving the Home Depot parking lots and the way the contractors were finding workers during this period of time is subsiding and they're going back to normal business. So that's good for us. We had five offices in New Orleans. We have three of them re-opened. And they're doing really well. Two of them just opened in the last few weeks. And we have the offices are filling up with workers. So those pocket shortages that were on our mind, not just New Orleans but all the way through the Gulf states, they're looking great. So --

What about Southern California and Florida, the Midwest --

Right. Those two large states for us. Well, we're very focused on the efforts that it takes to bring good workers in, and I mentioned here that we're focused on tenure an keeping them. We're really not having sales struggles because we can't find workers. Okay. Now, I'm not going to tell you that our branches aren't having to work at it and maybe sometimes they don't have to but right now, we're not spending a lot of money on it but it's just taking a little bit of extra effort, and paying attention to some basics, making sure we invite the workers back the next day when we pay them each night, making sure that we're taking care of them and that they feel -- they know we've got a job for them tomorrow, doing a little basic recruiting and a little more of handing out flyers and rounding up good quality workers. So with just a little bit of basic blocking and tackling we're filling these worker pools up pretty good.

Thank you.

Not a concern right now.

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

No. Just thank you, everyone, for participating in our call. And we appreciate all your interest in our stock and look forward to talking to you next quarter. Thank you.

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