TrueBlue Inc (TBI) 2006 Q1 法說會逐字稿

Good day, everyone. And welcome to the Labor Ready 2004 first quarter earnings conference call. Today’s call is being recorded.

Joining us today is Labor Ready President and CEO Joe Sambataro and CFO Steve Cooper. They will discuss Labor Ready’s first quarter earnings results, which were announced yesterday. If you have not received a copy of this announcement, please contact [Lisa Woodrow] at 1-800-610-8920, extension 8206, and a copy will be faxed to you.

At this time, I would like to handle the call over to Ms. Stacey Burke for the reading of the Safe Harbor. Please go ahead, Ms. Burke.

Thank you.

Here with me today is Labor Ready’s CEO Joe Sambataro, President Steve Cooper, and CFO Derrek Gafford. They will be discussing Labor Ready’s 2006 first quarter earnings results, which were announced after market close yesterday.

Please note that our press release includes an income statement, balance sheet, and cash flow statement, all of which are now available on our web site 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 the 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 & Exchange Commission, including our most recent Forms 10-Q and 10-K.

I’ll now hand this call over to Joe Sambataro.

Thank you, Stacey. Good morning, everyone.

We are extremely proud of the Company’s strong performance and our ability to deliver another quarter of record revenue and net income results. Revenue for the first quarter increased 22 percent to 297 million. Net income for the quarter was 11.5 million or $0.21 per diluted share, a 37 percent improvement in net income excluding incremental stock based compensation.

These strong results reflect our ability to continue to grow same-branch revenue, in addition, consistent gross margins, and our ability to successfully control costs were positive contributors to our net income growth this quarter. The Board of Directors, executive leadership team, and employees throughout the Company are committed to sustained growth.

With the strongest Management team in our history we are making a positive difference in the lives of our workers and in the communities where we live and work. I am confident we will continue to deliver shareholder value for years to come.

As you may know, I am retiring next month. I would like to take this opportunity to say what a privilege it has been to tell the Labor Ready story and to serve this Company as CEO.

I look forward to continuing to serve as a member of its Board, and it was truly an honor to be associated with this leadership team, and I look forward to watching the team and the Company’s continued growth.

We have a bright future thanks to our hardworking Board, employees, and workers. Every day they fulfill our mission of putting people to work, resulting in sustained growth and a great return to our shareholders. I’m confident Steve Cooper will provide the leadership to continue our growth in revenue and earnings well into the future.

I would like to turn the call over now to Labor Ready President and soon to be our CEO, Steve Cooper.

Thank you, Joe.

First off, I want to congratulate and thank Joe for his service as Labor Ready President and CEO. His leadership has been tremendous. He has instilled solid values into our organization. His long-term vision and the implementation of our strategies have increased shareholder value over eight times during his five-year tenure as our CEO.

We are pleased that Joe will be continuing to serve the organizations and shareholders as a member of the Board of Directors. We look forward to working with Joe in this capacity for many more years.

Our net income per share in the first quarter was $0.24 excluding the incremental share based compensation expense under SFAS 123R of $0.03. This is an improvement over the $0.19 a year earlier, and $0.03 a share ahead of our earlier estimates. The up side came from strong branch, same-branch revenue growth, consistent gross margins, and controlled operating expenses.

Our three main strategies in place to sustain our revenue and net income growth continue to be, first and most important is grow our same-branch revenue. We remain confident that as we grow same-branch revenue we have the opportunity for substantial net income growth. This leverage on same-branch revenue has been producing over 3 percent of net income growth for every 1 percent of same-branch revenue growth.

Our same-branch revenue growth in the first quarter was 11 percent, therefore, we continued to hit the leverage model that we expected in Q1 as net income grew 37 percent excluding SFAS 123R. That is why we put so much effort into our first strategy.

To further understand the importance of strategy number one, I should point out that our branches’ recruiting capacity is running just over 50 percent of what we believe to be full productivity. This productivity ratio has been moving up the past couple of years, however, still we have a lot of capacity remaining in our current branch network. With this excess capacity we continue believe the best use of our resources will be to focus on growing our same-branch revenue to better leverage the fixed costs we already have in place.

Further to strategy one, we’ve been very focused on increasing the productivity and effectiveness of our sales representatives. This has included an increased focus on sales training. We started this effort of improved sales training last fall, and it has continued into this spring. We are seeing great results from this increased focus on training.

We also put in place on January 1st of 2006 more specific accountability tools for the sales reps. These tools allow us to better track the individual productivity of each sales rep. This allows us to coach and improve performance of each person, and structure a compensation plan for these sales reps that are in better alignment with their individual productivity.

As we grow our same branch revenue we are also focused on ensuring that we have all the necessary recruiting and retention tools in place to meet the increased demand for our workers.

We have been improving our ability to contact potential workers through the use of better technology. Once we have recruited a worker to join us at Labor Ready, we are increasing our efforts to retain these workers for a longer period of time. We are doing this through the basic means of recognition and tracking to send a positive message to the workers that they are important to us and to our customers.

Our efforts are ensuring that we have all the necessary workers available to meet our increasing customer demands, and our efforts are paying off as worker shortages have not been an obstacle to growth.

We have been extremely focused the past three years on safety. We care about the health and welfare of our temporary workers. We established procedures over the past three years that have proven to do just that, keep our workers safe.

We established many of these vital procedures in California three years ago, with the great results there we have gradually rolled these screening and safety measures nationwide over the past two years, and just finished our final geographic rollout at the end of 2005.

The results of these additional safety measures have been fewer injuries to our workers. Over the past three years we have cut our injury rates almost in half, and we are continuing to see declines.

This not only meets our objective to keep our workers safe, it has also provided great financial results, as well. Lower workers compensation costs provide higher profit, as well as help us to remain competitive in every marketplace in which we operate.

Our second strategy in place to sustain our growth is opening new branches with a disciplined approach. Each year we plan to open approximately 5 percent of our base into new locations, therefore, over the next five years we plan to open approximately 250 new branch offices.

We are on track to open 43 new branches in 2006, of which we have opened 23 through the first quarter. These 43 branch openings include a mixture of Labor Ready, CLP Resources, Workforce, and Spartan Staffing offices. We remain pleased with the process of opening in new markets and our breakeven points remain on plan.

Third, our third strategy to grow includes diversifying our service offerings. This strategy has been executed over the past two years through the acquisition of Spartan Staffing and Workforce in April 2004 and the acquisition of CLP Resources in May of 2005.

We remain pleased with the performance of these acquisitions and the integration into our family of specialty lines. Through the execution of this strategy we have not only provided some great returns for our shareholders, we have added depth to our Management team, improved our own operating performance by sharing best practices with each other, but most importantly we have established three new regional platforms that we can expand and grow into a national presence. This strategy of diversifying through acquisition will be a strategy that we will continue to monitor closely and approach in a disciplined manner.

Our 2005 results included seven months of operations for CLP Resources, as we purchased them at the end of May. Although CLP produced net income growth in each of the first seven months of 2005, the first few months of each year are seasonally the slowest in revenue. And as expected, those operations produced a slight loss in the first quarter.

We expect the CLP operations to produce close to breakeven results in Q2, and provide growth and income once we get into Q3 where the results will be more comparable at that time. The impact of consolidating CLP resources in Q1 and Q2 of 2006 has the appearance of slowing income growth for our consolidated results, while the revenue growth has accelerated. This is not a concern for us as it was all part of the plan when we acquired CLP. We are pleased with the operating performance of CLP Resources, and we are confident this will provide a growth platform for many years to come.

Now, I want to discuss our revenue trends for the first quarter, along with our expectations for 2006. The increase in revenue during Q1 came from the following categories. First, as mentioned, branches opened one year or longer grew 11 percent. Two, new branches opened less than one year net of those closed during the year contributed 30 basis points of growth. Three, the CLP Resources operations that we acquired in May of 2005 contributed 11.7 percent growth. Four, other items net such as currency and the shift of New Years into Q1 this year and Easter out of Q1 versus a year ago accounted for the remaining difference of a negative 90 basis points.

Our monthly trends that made-up same branch revenue growth of 11 percent for the quarter were as follows. These are all adjusted for the shift in New Years and Easter. January grew 12.9 percent. February 10.9 percent. And March 9.6 percent. We are estimating Q2 same-branch revenue growth rates to be approximately 8 to 9 percent which is right on current trend.

Q2 sales growth overall will be impacted by having Good Friday and Easter in Q2, compared to having it in Q1 in 2005. This will be an impact of about 1 percent on our revenue growth rates.

Our revenue growth in Q1 was distributed pretty evenly throughout our operations. We saw particularly strong growth in our Texas market. The flat and sometimes negative trends we have seen in the Midwest States has turned positive, which is also exciting to us. Our U.K. operations continued to see improving trends during the quarter, and U.K.’s current performance is on an upward track.

In summary, it was a strong quarter overall. Solid same-branch revenue growth along with strong pricing ability sends a signal that demand will continue to be strong throughout 2006. We are confident in our ability to control operating costs, which will continue to provide leverage to grow our net income.

At this time, I’m going to turn the call over to Derrek Gafford, our CFO, for a further break-down of some of our trends in gross margins, operating expenses, and net income. He will then open up the call for any questions that you might have. Derrek.

Thanks, Steve. Good morning.

The Company produced another record first quarter, largely due to the strength of same-branch revenue growth, consistent gross margins, and continued leverage of our operating expenses. Gross margin for the first quarter was 31.3 percent, in line with gross margin for Q1 2005 and 30 basis points above our expectation of 31 percent.

Sale and pay rates both increased 4.2 percent during the quarter, and payroll taxes and workers compensation costs remained stable in comparison with Q1 last year. We estimate gross margin for the year as a whole to be approximately 31 percent or slightly higher.

Selling, general and administrative expense as a percentage of revenue was 25 percent for the quarter compared to 24.4 percent first quarter a year ago. Excluding two unique items this quarter our SG&A would have been approximately 23.7 percent, an improvement of about 7 basis points over the same quarter a year ago.

I’m going to provide some additional background on these two items. First, due to the implementation of SFAS 123R and the majority of our equity compensation programs switching to restricted stock at the beginning of 2005 we incurred approximately 75 additional basis points of expense this quarter.

Second, we purchased CLP in May of 2005 resulting in a higher blended SG&A percentage for the Company as a whole. This added about 60 basis points of additional SG&A to our blended rate this quarter, as CLP’s SG&A percentage is higher than that of Labor Ready’s.

After adjusting for the two items I just mentioned we experienced leverage in operating expenses of 70 to 80 basis points for the quarter in comparison with Q1 a year ago. This kind of strong operating leverage is why a significant amount of our efforts remain focused on increasing same-branch revenue.

Please keep in mind that the two items I just mentioned, stock based compensation expense and the higher SG&A costs for CLP, will both have an impact on second quarter of this year.

We estimate an incremental 40 to 50 basis points of additional expense related to stock based compensation and an additional 30 to 40 basis points of impact to our blended percentage of SG&A related to the higher run rate of CLP’s SG&A percentage. These will both impact second quarter. The impact on our blended SG&A percentage from the acquisition of CLP will stabilize in the third quarter and CLP will have been owned for a full year at that point.

We continue to estimate SG&A for the 2006 year to be approximately 22.5 to 22.6 percent of revenue, a decrease of 60 to 70 basis points from the prior year.

Net income for the quarter was 3.9 percent of revenue compared to 3.8 percent Q1 last year. Net interest income improved to .9 percent of revenue compared to .2 percent in the same quarter a year ago. The increase in net interest income is largely due to a reduction in interest expense related to the elimination of $70 million of debt in June 2005, as well as higher cash balances and increased yields on invested cash.

This quarter our net income increased 23 percent, while diluted net income per share increased 11 percent, both in comparison with the same quarter a year ago. The difference between the growth rates in net income and diluted EPS is primarily related to the interest on convertible debt in Q1 2005 and the net income in our diluted EPS calculation in that quarter. Thus, earnings per diluted share in Q1 of 2005 received an add-back benefit that is not present this quarter.

Our income tax rate increased to 38.5 percent from 37.6 percent Q1 a year ago due to the expiration of the work opportunity tax credit. We continue to estimate an income tax rate for 2006 of approximately 38.6 percent. Our income tax rate will continue to be about 50 basis points higher than the rate in 2005 until the tax credit is renewed.

Yesterday we released diluted net income per share guidance for the second quarter of 32 to 34 and for 2006 of $1.33 to $1.38, based on estimated fully diluted share count of 54.7 million shares for the year. This estimated share count does not include any repurchases of the 1.2 million shares in the announcement in our press release yesterday.

The business model continues to produce strong leverage in operating margins since the incremental operating profit on each additional same-branch revenue dollar is slightly above 20 percent. We are pleased with the leverage the business continues to produce as average branch volumes increase, and remain confident in its ability to provide future value to our shareholders.

At this point, we’ll open the call for any questions.

[CALLER INSTRUCTIONS.]

Your first question comes from the line of Craig Peckham with Jefferies.

Hi, good morning, everybody. And, Joe, first off congratulations on a job well done, and best of luck in retirement.

Oh, thanks, Craig.

I wanted to ask just a question here, as we look at the sequential monthly trends for same-branch revenue growth, could you give us a sense for to what extent warm weather may have been a factor in say January and perhaps February?

It’s probably slight, Craig, there’s a little bit of warm weather in January and a little of wet weather in March on the west coast, especially. So, it might have had an impact, but it’s hard for us to pull that out. It really is hard for us to say what’s weather, but we know both those things happened.

Okay, and I wondered if we could drill-down a little bit more in your outlook and plans for your sales force? Could you give us a sense for sort of what your sales force headcount looks like? How you intend to grow that? And sort of geographically what are the areas of focus in that regard?

Yes, there’s a couple of things going on. First and foremost, is we’ve trained everyone out in operations on sales. So, the sales training that I’m referring to impacts all the branch managers. We’ve pulled them together in two different significant sales trainings, one in the fall and one in the spring, to teach every branch manager how to be a better sales person. And so that’s our best sales force right there.

Now, on top of that, we have a number of other sales representatives out there. I don’t have an exact number for you right now, the classifications aren’t the same everywhere, but there’s approximately 250 sales reps out there that support these branch managers. They’re in larger markets, they’re in the larger branches, and that team we’ve instituted a little bit different management in some of the pocket markets that we’re testing. One is to not have them be managed by the branch manager, but to have them be managed by a more professional sales manager.

That’s only in a handful of markets right now, but we’re seeing good results from these sales reps being managed by a more professional sales manager. It gives the branch manager a chance to focus on the operation. To begin, these sales reps only exist in larger branches, and when we have a larger branch that branch manager needs to be more focused on recruiting and the throughput of the workers out in customer service. So, the two initiatives are working hand in hand.

Okay, and then just a last question and I’ll let some others go. As far as the share repurchase goes, you know, just to be clear, obviously, it’s not included in the guidance, but are you also saying that you plan to complete that 1.2 million share buyback in the second quarter?

Yes, that’s our plan. We’ve had good discussion on this at the Board level and Management feels comfortable at these prices. And, obviously, you know, something crazy happened and the stock ran-up for a bit. We may not go fast at it, but these prices they’re currently trading at through the announcement yesterday, we’re very comfortable with that. So, we believe that we can execute this during the second quarter.

Okay, thank you.

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

Yes, good morning. A couple of questions, when you look at your turnover statistics, Joe and Steve, have you seen that this new sales training and new compensation plan has had an affect one way or another? Could you give us an idea of what those trends have been over the last couple of quarters?

Yes, I don’t have the exact numbers for you. We haven’t broken the account reps, the sales rep turnover down and shared it externally. But it did leap-up a little bit, Jim. It was expected. We knew that there would be a little of it falling out.

The past compensation plan for these sales reps is they were compensated a certain percentage of all of the revenue that flowed through our branch. And when we put these tools in place where we could measure the individual productivity, these sales reps, it did cause a little havoc.

But we weren’t concerned with that, this is exactly what we wanted. We wanted individuals in place that could live-up to that individual accountability, and we’re finding that we’ve been able to replace those that left with stronger people. Those that really want to have sky is the limit on their compensation but it’s tied to their own productivity, and we like where this is headed.

So, you don’t feel that that limited any growth in the quarter? It was more, you know, as you said, the individuals who maybe weren’t going to work-out anyway?

Yes, now, I’m not saying that those individuals that left weren’t doing anything, but what we found is when they were tied to the revenue of the entire branch their duties might not all be about selling that day. They’re helping the branch manager with the full productivity of that branch.

What we wanted to do was separate the job duties a little bit more and say, ‘salespeople, you’re compensated on bringing in new accounts, so get out there and bring in new accounts.’

And when we separated the compensation that specifically, it sounds a little painful for individuals. They were good people but we wanted better people, and that’s what we’re getting.

Okay, do you think that’s primarily behind us or we could see some more over the next couple of quarters?

Yes, it’s just not a concern, it’s done nothing but drive productivity up, Jim. By having that little bit of turnover I’ve got to be honest with you, you know, those people were doing something. I’m not saying they were totally unproductive, but they, obviously, they ran from their own sales productivity.

And so someone that was willing to leave the Company because now we’re going to compensate them just on what they go out and bring in, we’ve increased our full productivity.

So, will there be ongoing turnover in our sales reps? Yes, that’s an area of concern, and we’re focused on that one, also, but it didn’t worsen our conditions. If anything, it’s going to strengthen us long term, but that wasn’t an issue during the quarter

Shifting a little bit to bill-to-pay spreads, have – can you give us an idea of what trends have been with respect to pricing? And are you experiencing any wage rate inflation? And, if so, are you passing it on to the customers at this point?

Yes, the bill and pay rate increase that I quoted earlier of 4.2 percent, that was pretty consistent through the quarter. So, while there’s been some inflation in pay rates we’ve been able to pass that on to the customer.

Okay, and with respect to workers compensation, you know, you finalized the rollout, as you guys have been talking about for quite some time. You finalized the rollout in the fourth quarter. When do you expect to see the full impact on gross margins of that now final rollout in 2006?

Well, I can talk a little bit about accident rates, and then we can talk about the impact of workers comp. You know, we’ve been really pleased with our, the decrease in the accident rate over the last three years. That’s been about 10 percent or more on a YOY basis, each of those three years. So, we’re still working hard on bringing that accident rate down this year. It’s been a phased roll-in of a variety of programs that have brought that accident rate down.

As far as the full impact to workers comp, you know, we get a report from the actuaries, Jim, every quarter, and that’s what we’re booking to. So, our actuaries are on that have given us their best estimate. What we can’t predict right now is where accident rates will be at the end of the year, and that’s the largest delta in determining the future impact of workers comp. But we’re not seeing any rise in our accident rates and actually still seeing some declines.

Okay, that’s very helpful. Thank you.

Your next question comes from the line of Mark Marcon with Baird.

Good morning. And, first of all, Joe, congratulations on a great run, and we’re going to miss you.

Thank you, Mark.

With regards to, just following up on Jim’s questions on the workers comp, in the past you’ve had some decent workers comp accrual reversals, was there one present this quarter? And, if so, how much?

Yes, let me compare this quarter to the same quarter a year ago. Q1 of last year workers comp came in at 6.4 percent, and that’s about where we finished the quarter this year. Last year there was some pretty good sized work comp reversals in there, about 70 to 80 basis points. And the amount of reversal this year was about half of that.

About 35 bits?

Yes, somewhere around there, about half. The two rates came out the same, really, on a quarter to quarter comparison, and the reason for that is although the prior year reversals or reserve reversals went down in about half, our 2006 rates that we’re booking to from our actuaries has also gone down with comparison to 2005.

Great. And then with regards to [Suda], can you give us a comment in terms of how that’s changed on a YOY basis?

Well, payroll taxes remained constant for us. I mean this has been a constant quarter for us on margin. The bill and pay rate, collections, workers compensation costs comparable, and payroll taxes, as well.

Okay, great. And then, you know, the overall same office growth rate of 11 percent is quite impressive. What – it doesn’t sound like, you know, there’s – weather was that much of an impact because January was warmer but March was wetter.

What would you attribute the strength to? I mean are you just basically seeing a general economic pick-up, is it the impact of the sales training increase in productivity? How would you characterize it?

Well, first, I’d say there’s a good economy out there, good employment, being hired, and it’s a nice environment to be selling into right now. That would be the strongest driver.

The second would be these productivity measures that I’ve mentioned are making a difference. And where we have additional focus on sales training we’re teaching these branch managers how to become more partners with their customers and not sell long-term staffing needs but sell long-term on-demand needs. Instead of just showing an update once a week or once every other week and say do you need any workers today, they’re developing longer term relationships, asking more questions about the customers’ own peaks and spikes in their demand, what their own seasonality might look like, and what’s tough to fill jobs that they have in their business that we might be able to take-over for them. A little bit is coming from that. It’s just this extra push to secure these relationships for a longer period of time.

So, we’re focused on two metrics that one is increasing the sales per customer, and, two, increase the number of hours that each worker works. And we don’t share those publicly but those are two things that we believe are long-term measures of whether the branch is creating longer term relationships with the customers.

And the projection in terms of the same-branch revenue growth for this quarter, is it just that you’re just being conservative in terms of assuming that it’s hard to sustain things? Or are you kind of already seeing that in April?

Yes, April, we’re right on trend for that 8 to 9 percent. Now, there was a shift at Easter, so it’s always hard to know, we’re doing some estimating, how we went in and out of Good Friday and Easter. And it’s always amazed me how much Good Friday really impacts our business. And people take a long weekend, and so it’s hard to get a good track going here so far in April. We’re not worried about it, but that’s one of the reasons, you know, this trend of 8 to 9 is where we see things.

But, you know, January, it’s a small revenue month, it’s a short month by the time you come out of the holidays, so the 12 + percent doesn’t get us overly excited for all those reasons. I think a better indicator is we just came out of March and it was wet and it was 9.6 percent, and so, yes, maybe there is some conservatism, maybe not. We like the 8 to 9. I mean it’s hard to get more granular than that, so.

All right. CLP, how did that change YOY?

CLP is not doing bad. They’re actually beating our own growth rate. The same-store sales that we’re quoting, CLP is slightly ahead of those rates, so but their business is so different than ours, it’s still trying to get used to it. It wouldn’t be a good comment for me to make because they’re not as consistent. They have bigger jobs that start and stop, where our business flows pretty evenly from week to week.

The number of workers a branch puts out this week, we can project the next 13 weeks pretty close on the last few weeks and how a branch is operated. CLP doesn’t really operate that way. They have, all of a sudden they’ll place 10 workers, and they might go a couple of weeks before they place 10 more. And so it’s hard to measure the week-in and week-out at CLP. Getting used to it, but it’s hard for me to comment anymore than that, Mark.

Okay, and then a final question. CapEx picked up on a YOY basis as well as sequentially, is that because you're opening up more CLP offices and they’re more expensive to open? And how should we think about CapEx for the year?

Yes, there’s a couple of things driving that. One is CLP and Spartan offices have more CapEx than the Labor Ready branch. And, two, we are doing some rebuilding of some computer systems, and that’s adding a little bit to the CapEx. But it’s not significant, but those are the two things that are driving that up slightly.

Okay, and what’s the projection for the year?

About 8 to 9 million.

Great. Super. Thank you.

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

Good morning, everyone. Sorry to see you go, Joe, but glad to see Steve in.

All right, thanks, Mike.

A couple of questions. I know you have a lot of different test initiatives out there to drive future revenue growth, but do you have anything that can track the new customers that are maybe new to the manual labor staffing or better yet, you know, for CLP new to construction staffing?

Well, in each of our branches we measure how many new customers they serve each week. It’s not something we share outside, but it’s a metric that we watch every week in every branch, of how many new customers they do business with.

And, as mentioned, we’re starting to track and use this metric of average sales per customer as a metric also. It’s not just turning and burning. And where we’ve really pushed hard to bring a lot of new customers in we’re going to now start measuring, you know, the size of the customer and push to retain these customers longer, and still, you know, needs throughout the year instead of just this one project that we happen to sell. It’s, yes, we do track that, I just don’t have anything that I share externally, Mike.

So, is that – that’s not necessarily new to maybe not done business with other staffing companies, where you’re taking business from competitors? But just new to Labor Ready or new to CLP?

Right. It’s just a new experience or a new customer, experience with us, that we’re measuring. So, I don’t have an indicator of whether they were using somebody else, or not.

On the – what did you mention, Steve, that the new branch revenue growth added to comps?

I quoted a net 30. I can give you the broad number.

Yes.

It’s sales from new branches was 1.3 percent and the closed was 1.

So, that’s a little bit up. Can you give us any trends on how the new Labor Ready branches are coming? And then, also, how the new CLP branches are doing?

Well, the CLP are just too new for us to really comment on. We’ve just put that push on this spring. The thing I can tell you is we’ve gotten them opened on time. We’re finding good branch staff to run them. We’ve found great locations.

And so that’s about the best things I can share with you at this point, is we’re getting into these marketplaces, we’re getting them opened on time, and we have great teams running them. I’ll have more to share in the future on that.

As far as the Labor Ready openings, you know, the new ramp-ups are fairly close to where they’ve been in the last two years. We’re very positive about these new locations that we’re finding for Labor Ready, and we don’t see any reason to not continue with this strategy.

Okay, and, finally, Jim mentioned pay rates and bill rates, and that you said both were 4.2 percent in the quarter. How much of that is minimum wage increases and then how much of that is actual or just roughly incremental inflation?

Yes, I don’t have that broken out, Mike. It’s less than it was last year. We’re on kind of the tail end of Florida minimum wage, it becoming a full year impact now. So, that’s becoming less of an issue. I mean if you were to single out anything in 2005 as far as minimum wage, that was the biggest contributor.

And there’s a collection of a few states with minimum wage increases this year, but they’re all relatively small at this point. There’s none that they’re moving their minimum wage up 20 percent or something like Florida was.

Is there any, then obviously pay rates or, you know, are moving as they are in every industry, and is there any concern that you can’t move your bill rate up at the same pace, or do you actually think that you can move it up at a quicker pace as you’ve done historically?

Well, that’s a good question. It’s really one of the hard parts of our model, Mike. As you know, we’re not in any long-term contracts. We are able to pass along our increases, that’s a metric that we watch on a week-in and week-out basis, and the whole operations team watches really closely. So, we don’t have any concerns at this time that we’re not able to pass those costs along to the customer.

Well, you say, I mean historically you’ve always been able to pass more costs than the wage inflation. I mean do you think you can continue to do that?

Well, we’ve never – we’ve always said that we can’t, the bill rate inflation compared to pay rate inflation, it can’t go on like that forever, or else we’d end up at an extremely, extremely high margin. So, I think the market forces are just starting to balance out right now. We’re comfortable that we can keep that even.

What’s driving that, Mike, is work comp and Suda rates had gone up there for a couple of years, and so the gap was to pay for those two items. And with those two items stabilized, you would expect that the wage and the bill rate would balance closer now. So, we’re not shocked with current events, and Derrek’s brought up the point, we don’t expect that gap to be wide unless one of those other two cost components is fluctuating for some reason.

Okay, and one last question. On the incremental stock comp, why is that trending down throughout the year? And I know that’s been your guidance, but is it that – I mean I’m assuming you’re not issuing any less stock comp, or any less stock based incentive, so?

No, you’re right about that, Mike. The first quarter, it’s just the way that the exercises and particularly the vesting and the grants happened to fall. So, first quarter it’s not equal in first quarter compared to the rest of the year. And the stock comp across the rest of the year, the incremental stock comp, is pretty evenly distributed. It’s just unique the way that the vesting works.

And so we’ll really see – once the lapping of the CLP acquisition happens then that’s when we’ll see continued I guess leverage on SG&A then? Because – go ahead.

Well, CLP, when we get to – since we bought them at the end of May and really sales started rolling in June, when we get around to the end of May then we’ll have CLP for a full year and we’ll start to be on an apples-to-apples comparison. So, when we get into Q3 the cost structures between quarters on a YOY basis, they’ll be in synch.

Okay, appreciate it.

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

Yes, good morning, everyone. I wondered if you could provide, Steve or Joe, a little bit more color on the turn that you’ve seen in the flat to negative trends within the Midwest and Texas?

Yes, Texas is being driven by a couple of things. One is, obviously, Rita has some impact there on the eastern border of Texas that we’ve seen great results. Two, I think their economy has been great down there in Texas. And, three, and maybe it’s even most important, we had a change of leadership in a couple of different positions down there six months ago, and it’s really paying off. We got some good talent down there.

Up through the Midwest, it’s not significant trend changes, but when you’ve been in a condition you’ve seen the manufacturing clients cross the Midwest, you know, I’m talking about St. Louis up into Michigan, all about the corridor and into Ohio that supports Michigan manufacturing has been pretty beat-up.

And, again, two things. I think it gets beat-down far enough that it starts growing again, the economies are stabilizing, they’re not, they haven’t returned to the levels that we had seen three or four years ago, but just to see them growing and the teams excited again. And, you know, small to mid-manufacturers, and really the logistics business growing, and that’s exciting. So, even if the manufacturing is being done somewhere else you’re seeing goods being distributed, again, and being moved around in those areas. So, that’s exciting.

And, again, up in the Michigan area there’s just, you know, we’ve had some turnover. When the results go bad that long even if it wasn’t involuntary turnover there was a voluntary turnover that happened. And time and time again when the results are that bad, and we’ve got a very stable team there now. We’ve got a district manager that’s running the Detroit area that’s been in position now a little over a year, and he’s doing a wonderful job.

So, it’s a combo of things, but outside of Texas the rest of it is just light trend changes. Texas has been pretty significant for us the last six months.

Okay, and circling back to the same-branch revenue trend that you’ve seen from January through your Q2 estimate here, a couple of questions. Have you seen that same pattern historically as you move from a seasonally slower time of the year into the springtime? And, also, is CLP included in those trend numbers?

Yes, first, CLP is not in the same branch revenue numbers yet. It will be starting in June. Since we bought them at the end of May.

To your first question about the trends and the spotty nature of these trends, there’s as low as 6 percent and as high as 12 percent, we’ve noticed that the last three years. You know, we, I think we spiked up and started getting good growth in Q4 of 2003.

And so during this last 10, 11 quarters or so, we’ve seen the monthly trends drop as low as 6, and then bounce-back as high as 12 or 14, and there’s really no one strong explanation why. A lot of it has to do with the YOY comps, and some of it has to do with weather, and some of it has to do with this, that, and the other thing. But it’s been spotty conditions the last 10 quarters.

We like the trend, we think it’s fairly stable in this 8 to 9, 8 to 10 percent same-store sales range. We’re not concerned that we’re seeing anything or even early during that whole 10 quarter period that we ever saw anything that concerned us long term. There was a period of time when it dropped off for a six-week period. I think it was last, the end of April and into May. And, again, we weren’t concerned. We were hearing enough strong demand. We were seeing pricing hold strong. We were hearing good things in the market. And sure enough we’re just about through it.

So, don’t have a great explanation for you there, except we feel very bullish about this 8 to 10 percent growing the, our same-store revenue. Going forward, we don’t see any reason why not.

Okay, and backing up a bit here, I guess if you looked forward, Steve, beyond ’06, it sounds like you’ll likely stay with your 5 percent new branch openings. Could you talk about maybe how you view the mix in those openings between CLP and your core Labor Ready? And where you see over the longer term some of the better opportunities?

Yes, as I mentioned, we like the 5 percent number. It’s not a rule, it’s just a rule of thumb, if you will. It’s really going to be based on human capital readiness. So, who is developing leadership teams? Who has branch managers ready to go? It also will be predicated on market strength. Okay, those are obvious things.

Now, you kind of ask, well, what’s on our mind? I would imagine half of our 5 percent will be spread to our other brands right now, and half will be in Labor Ready. So, we head down the road thinking we’re going to open 40, 20 Labor Ready’s, 20 others.

Of the others right now the two that are really leading the charge is CLP and Spartan. Workforce is a very regional based southeast company, and they’ve got a couple of fill-ins. One or two here, that’s not going to be a strong rollout at least in the next year or two. But Spartan and CLP were regional based companies that we feel very strong belong nationwide.

So, you’re going to see those two brands based on the readiness of their teams expand, and the CLP team is leading the charge. They have a little bit stronger corporate office that came with them. they’ve got – they already had plans in place. They were ready to go. We bought them from a private equity firm that had them poised for growth, so they had a lot of their strategies in place and, therefore, between, at the end of 2005 to today they’ve opened 14 offices. So, we expect in the year 67 offices with CLP. That’s strong growth when you’re only about 51 10 months ago. So, that team was really raring and ready to go.

The Spartan team is doing fantastic, but it was a smaller team. We only bought nine offices in that Spartan brand, and they’re were 30. And we’ve only owned them two years. And so they’re growing fast, and as fast as they can get teams ready we’ll expand.

That’s very helpful. And one final sort of bigger picture question here, could you discuss how you view the current immigration debate, I guess especially under a possible outcome where existing illegals would be allowed to obtain a visa? How do you think that might impact your recruiting, your labor costs, and which business segment do you think would be the most impacted here?

Well, I can’t really comment on the political side of that. And understand do I believe it’ll pass or not, and how that’s all going to play-out, but from a personal point of view I believe that it would be a good thing to allow these people that are here in the U.S. to go to work legally and have them work under the protections of the laws of the United States of America, under the wage and hour laws, under the equal opportunity laws, and under the worker compensation laws. I believe that those people deserve the right to work with protection. And, therefore, if it does pass we’ll gladly put these people to work if the government would give them documentation.

At the same time I believe that there’s companies out there, whether they’re in the small staffing companies or small businesses that are putting these people to work already. And, again, they’re putting them to work without the protection of the laws of the United States.

So, there’s somewhat of an uneven playing field, if you will, that if we opened up these immigration laws it would benefit us, because now we would have access to these individuals where currently maybe some of our smaller competitors and some of our smaller customers are already accessing these people, and it would level the playing field for us. So, that’s somewhat of a personal view, but that’s how we view it right now.

Thank you.

Your next question is from the line of [Avi Fisher] with Harris Nesbitt.

Hi, thanks for taking my call. What same-store sales guidance have you embedded in the ’06 estimate? You had initially I think had 8 percent, you’ve said in the past – has that changed?

Well, if I think I understand your question here, what same-store sales is embedded in the 2006 estimates?

Yes, guidance.

Guidance, yes. It’s about 8 percent.

Isn’t it kind of low considering that 11 percent this quarter, guiding it to 9? Plus CLP becomes the same-store in the second half, is that just being conservative, or?

Well, it’s no different than the way we’ve been projecting the last five years, and we may miss it low a couple of points, we may miss it high a couple of points, but it’s our best estimate.

Now, the 11 percent, you just have to understand over 12 percent of it came in in January and March was just a little bit under 10, and we’re trending in April under 9. So, you know, we’re just calling it as we see it, but it’s obviously as I mentioned in the last question, it’s been spotty over the last 10 quarters.

Right.

So, it could drop to 6, or it could pop-up to 14. We’re busting our butts here to make it 14.

All right. At the end of ’05 I think 39 percent of revenues came from construction and landscaping, how would you characterize the commercial construction market?

Well, we haven’t seen a significant shift in any of our mix of business. Commercial construction through the end of 2005 was strong. The housing market was getting all the noise, and we didn’t see that that impacted us.

And, you know, really heading here into 2006, given the fact that Q1 is our slowest construction quarter anyway, we haven’t seen a big enough mix. I think that we’ll get a better read into that as we move into Q2 and Q3 of whether there’s been a shift in construction.

So, just to clarify, Q1 doesn’t really have much of a benefit from the construction?

Well, it’s not that it doesn’t’ have a benefit, but the reason that Q1 slows-down is construction, anyway, so the reason our quarters aren’t balanced equally, for instance, our spread on revenue goes close to this. 20 percent in Q1, 25 in Q2, 30 in Q3, and back to 25 in Q4. The reason that Q1 is only 20 percent of our revenue base is the construction, construction falls off. So, as construction ramps up here in Q2 and Q3, I might have a better read on your question, but right now I don’t have enough – any reason to be concerned.

I’ll keep it in mind for next quarter. Just one last question, on the share buyback, have you been – are there any restrictions on when you can buyback shares? Have you been in the market yet in April?

No, we have not been in the market. This is just something that we’ve discussed over the last month, and we have, the fact that we discussed this right around quarter end, we didn’t start buying until – we wanted all the news out, and so we were completely out of a blackout for the executives, and we consider the Company to follow the same blackout patterns as the executives follow.

How soon can you start?

We could start next week.

Okay. Thank you very much. And thanks, Joe.

Thank you.

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

Yes, good morning, guys. Just wanted to, you know, CLP is now almost a year under your belt, so just wanted to get an update in terms of how that integration has gone? And perhaps a bit of an update in terms of how the acquisition pipeline looks for you, and whether or not we should read anything in the buyback? Is it that maybe it’s less likely there would be anything on the horizon? Thanks.

Well, the CLP, we’re very pleased with the way acquisition has worked. The management team has stayed in place, the management team that we were extremely concerned about when we bought them, a big reason that we bought that company is because of the strength of that management team. They blended very well with our Labor Ready team.

As I mentioned earlier, we’ve shared best practices back and forth, not only with CLP but with the Spartan team, and we’re learning a lot from them. We buy these little regional companies that have been very entrepreneurial based and have a lot of magic, if you will, in their operations, and we brought that back into our own Company. So, we’re very pleased with that.

On the systems and process and procedures, you know, we’ve talked that there’s kind of a three-phase category or process to take an integration, an acquisition through, phase one being the culture. And phase two being process, systems, policies, that type of stuff. And then phase three really being out there integrating customers and workers.

And really on both, all of those acquisitions, we’re just kind of sticking our toe into phase three, which is the real power of the integration. Spartan and Workforce are well into stage two, the policy procedure systems. CLP was a larger acquisition that came with a stronger management team, and, therefore, we’re spending more time in the cultural phase. There’s not a lot of synergies that we’re looking for in phase two anyway. We really want to jump from phase one to phase three with CLP.

So we’ve taken a pocket, we’re working on phase three which is integrating customers and workers. And that’s pushing the cultural boundaries really hard, as we take one of our strongest pockets. And we’re continuing to push on that. We’ve got great support from the CLP management team. They’re as interested or more interested than we are on sharing workers and customers, so the objective is very common, the vision is common, and we’re not having any issues there, and we’ve been very careful and respectful of their culture.

We like what we bought, again, we like the magic that we bought. We’re trying to keep that magic alive in that company, therefore, we’re not drowning them with our own culture. We’re just blending the two slowly. So, all in all, to summarize that, we’re pleased with the way the integration is going.

Now, your second question was ‘what’s the pipeline look like?’ We have a team that’s solely focused – not solely, a big part of their job is focused on looking for acquisitions. They’re in tune with some brokers, some bankers, whatever it takes in the industry.

We’ve got a pipeline of about 165 companies that we’re watching very closely. We’ve interviewed those, we’ve screened them. We’ve got it narrowed down to probably 10 percent of that list that we are in, I wouldn’t say constant communication with management but we watch them a little bit closer. Of that 15 or so that’s on that list we’ve got two or three that we are in communication with.

But as disciplined as we are, and we’re not running out there throwing money all over the place. So, with that disciplined approach, you don’t put these deals together quickly. We have so much good going in strategy one, growing same-branch revenue. We’re not going to mess it up. If we can find good deals, like we found in Spartan, Workforce, CLP, where their shareholders get good benefit, get good value for selling, our shareholders get good benefit, good value, we’ll move forward.

Now, does the share repurchase throw a signal? Well, it throws the signal that we didn’t get one done in Q1, and that we do have, you know, $200 million of cash. It throws a signal probably that there’s not a huge one out there, that we’ve got on the line, but it doesn’t at all throw a signal that we’re not still focused on what we call strategy three, and diversifying.

We’ve got our finger on the pulse, again, with a very disciplined approach. We don’t believe that putting the share repurchase of up 1 to 1.2 million takes us out of the game, to continue in the acquisition game, but we think it’s a good balanced approach to using capital here.

Great, and thank you very much.

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

Thanks. Not too much left to ask. But one thing I guess, Steve or Derrek, is in your EPS guidance have you assumed the share buyback or is it on, you know, the current share count?

Yes, in the estimated number of shares we’ve given, we haven’t assumed any repurchases in that share count. However, we have not taken any interest income out of our estimates that would not be realized by purchasing the shares. So, those are the two things that you need to keep in consideration if you’re doing any of your own modeling, is that when that cash goes to repurchase the shares there will be lost interest income.

Right, okay. And then the other thing I guess looking forward and looking, things for Q3 and Q4, and you start to lap, the CLP acquisition and the leverage of the businesses is obviously that much more easily visible. If I’m doing my math right it looked like for the back half to get to your numbers, your guidance, that you’re kind of assuming that 70 to 80 basis points is sort of natural leverage that you saw out of Q1, adjusted for the other factors is kind of the way you’re thinking about the back half of ’06?

Yes, keep – there’s two things, number one, Q3 is our strongest revenue quarter, so with that revenue comes additional leverage of our operating costs.

And then we talked about fourth quarter, a legal charge that we took, and we’re not anticipating that being in there. So, as far as year over, or quarter over quarter leverage goes, those are two things to keep in mind, and we are expecting a good amount of the leverage coming in the back half of the year.

The ratio looked, a better drop in Q4, but that’s just because the legal cost is in there from a year ago?

Yes, if you look at this on an annual basis, we’re looking for about 60 to 70 basis points of leverage on a YOY basis. We’ve got a legal charge that we had in 2005 that won’t be there, but we’ve got stock based compensation coming back in, the two of those about wash each other out to give you both a real and normalized drop in SG&A of 60 to 70 basis points for the year.

Okay, well, that makes sense. Any thoughts maybe on moving parts over the long haul where I mean you look back to your biggest leverage year which was ’04, and obviously things started to ramp-up considerably, you had really good same-stores throughout the year, better than you probably are likely to see in future years.

But how much, you know, if you had to take it, for how much offering leverage or how much SG&A decline rate do you think is reasonable for, you know, a two, three-year period? Can you work it to 100 basis points a year based on what you foresee in business, the way you run your business?

Yes, we haven’t come out with that. 100 basis points a year is aggressive. You know, what, the thing that stays constant here is the incremental operating profit on each additional sales dollar, and that’s slightly above 20 percent. That holds constant. The leverage is just amassed, as the base each year gets bigger. So, I think if you stick close with the 20 percent incremental operating profit in your modeling I think you’ll be close.

Right, I guess revenue growth is the bigger variable. Okay, very good. Thanks.

Your next question is a follow-up question from the line of Mark Marcon with Baird.

I was wondering with regards to worker availability, are you seeing any tightening anywhere? We’ve noticed in terms of the BLS numbers that the unemployment rate for people who have less education has been dropping considerably. Is that becoming an issue at all?

Well, we have our eye on that, for sure, and that’s one of the reasons I mentioned that we have been very focused the past year and actually put some techniques and some technology in place to help us with recruiting contacting, and tracking, and put some recognition programs in place, and making sure that we’re sorting out this work force.

Part of this worker compensation savings and the safety has also brought us higher quality workers, not educated by any means, but we’ve sifted through this, and we’re getting a more reliable workforce. And so we’re expecting the number of hours worked per individual to go up, which is really filling our demand. So, worker shortages are not an obstacle to growth right now. We have our methods and our visions of how we will fill the future demand.

Now, with that said, yes, there’s pockets, even during 2001 and 2002 when we were seeing declines there were pockets of shortages. That just requires a little more focus in those offices on recruiting. But we seem to fill the customers’ demand, and we can continue to grow.

Florida, in particular, you know, during the soft spots when the Company was flat and the revenue, Florida was down there growing at 20 and 30 percent with worker shortages. So, it can be done. You can grow at 20, 30 percent, even when the branches say, ‘well, I’m running out of workers by 2:00 in the afternoon.’ Okay, well, you’re growing at 20, 30 percent, let’s recruit then between 2:00 and 4:00 in the afternoon.

And we’ve put a few procedures in place that have just blown our branches away, if they follow these basic procedures the branches are full of workers. So, not a concern right now, Mark.

Super. And CLP, did you say it’s going to generate a loss in the second quarter?

It’ll be about break-even. It will generate a loss in April and May. And June they’ll probably produce enough income to offset those losses, but so through the first five months of ownership, yes, the five months, they were lost months.

Okay, and then with regards to you mentioned that the construction really varies by season, by the time you get out to the second and third quarter, I know that construction overall is roughly about 40 percent, but is that, does that run around 50 percent when you get into the second and third quarter?

Yes, I don’t have a break-down of our business mix that I can share with you by quarter. It does vary, you know, about 5 percent that I quoted where Q1 is 20 and Q3 is 30, definitely that’s impacted by construction. I’m not going to sit here and tell you the whole 5 percent is but definitely a big chunk of it is going to be.

Okay, and then in terms of the buyback and a related question to that, you know, it looks like the effective yield on your corporate cash was quite high, is there anything unusual this quarter as it relates to that?

And then how do you think about accretion, dilution on the buyback relative to if, in fact, the effective yield that you experienced in this last quarter is sustainable, how do you think about accretion dilution, or how should we think about that?

Yes, there was a good pick-up in interest income, net interest income particularly, this quarter when comparing the same quarter a year ago, as well as sequentially, if you’re comparing to Q4.

So, a couple of things to keep in mind on our yield. Our cash balance is obviously earning a yield, and we also have restricted cash that’s set aside that’s also earning a yield. So, as we move into Q1 if you’re comparing with Q4 of 2005 we had a stronger cash balance and our free cash as well as restricted cash, and yields moved up on our investments. We’ve been on the short end of the curve, so as the yield curve has moved up so has our return.

In regard to accretion and dilution on the share buyback, really the main point there is comparing your tax equivalent yield to where your net income percentage is. And right now while our yields are good it’s still beneath what our annual net income percentage is, so it’s accretive for us.

One of the things to keep in mind, Mark, Derrek kind of alluded to this, but a big chunk of that interest net is the bond that went away. So, don’t get confused that that big pick-up is all about interest on the cash balances. A big chunk of that was that bond interest, and that goes on a comparable basis, that went away in June of ’05.

Right. I was just looking at it on an absolute basis, you know, with the assumption that a certain percent, if we were to take a look at the average cash and marketable securities between the first quarter and the fourth quarter, and then, you know, assuming that a certain percentage is in your cash machines and, therefore, not generating any interest. I was just looking at the absolute affect of yield and it looked to be quite good.

It’s about – you’re seeing most of ours is tax exempt. It’s about 3 percent on an annualized basis. When you’re trying to calculate the yield you’ve got to also be looking at restricted cash, as well, because that cash is also using, returning a yield. So, if you’re just looking at the cash balance it will make the yield look, the denominator will be too small and make the yield look really large.

Got it, so we should also include that restricted cash in there, okay?

Right.

Great, that helps a lot. Thank you.

Your next question is a follow-up question from Mike Carney with Aperion Group.

One more question. The, Steve, when you mentioned dilution in the first quarter for CLP, break-even in the second quarter, and profitable in the third quarter, is that including amortization?

Yes.

That’s including, okay.

Yes.

Because, of course, the company was profitable before you bought them.

Yes, they still had this trend that their first four or five months of the year were, you know, close to break-even, so even with the extra amortization.

Right, okay.

And since we’ve bought them, they’ve had a pick-up in revenue, and they’ve had a pick-up in operations, enough to pay for the amortization.

Okay. And, also, Joe, now that you’ll have time to use the speedboat how do I get an invite?

Just give me a call, I’ll be happy to invite you.

All right, thanks.

At this time, there are no further questions. Mr. Sambataro, are there any closing remarks.

Just thank you, everyone, for attending our call this morning. And should you have any further questions feel free to call me, Steve, or Derrek. Thanks a lot.

This concludes today’s Labor Ready conference call. You may now disconnect.