TrueBlue Inc (TBI) 2006 Q2 法說會逐字稿

Good day everyone, and welcome to the Labor Ready second-quarter 2006 earnings conference call. Today's call is being recorded. Joining us today is Labor Ready President and CEO, Steven Cooper and CFO, Derrek Gafford. They will discuss Labor Ready's second-quarter earnings results, which were announced yesterday. If you have not received a copy of this announcement, please contact Lisa Latrell 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.

Thank you. Here with me today is Labor Ready CEO and President, Steven Cooper and CFO, Derrek Gafford. They will be discussing Labor Ready 2006 second-quarter earnings results which were announced after market closed 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 Steven 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 recent forms 10-Q and 10-K. I will now hand this call over to Steven Cooper.

Thank you, Stacey. Good morning, everyone. Let me start off by addressing our same-store sales trends that we've seen. We had guided 8% to 9% same-store sales for the quarter, and it came in at 8% with future guidance around 6%. You're going to hear from us over this call that the trends held pretty strong throughout the quarter. By the time we hit the middle of June we did see a fall off, and we've guided our future at about 6% same-store sales. I do want to state thought right off the bat on this call that we stepped off a small curve, but it was on to some pretty solid ground. And we are pleased with the performance, not only the quarterly performance but the ability to adjust our business over the last three or four weeks. You're going to hear from Derek and I some of the operating trends, the go forward guidance and why we are pleased with this performance.

During the quarter we grew revenue 15% to $340 million with 8% of this growth coming from same branch revenue. 7% of our growth was attributed to CLP resources, the skilled trade staffing company we acquired in May of 2005. Changes in revenue related to other items, such as new branches, closed branches, currency fluctuations and shift in the Easter holiday billing date all offset each other and collectively had no impact on revenue growth.

Our same branch revenue growth throughout the quarter was as follows. April, 8.6%; May, 8.5%; and June, 6.4%. We had fairly stable week-to-week sales trends throughout the quarter, up to about the middle of June when our revenue growth trends declined. Our growth rates have since stabilized around 6%. This decline appears to be directly related to residential construction activity and the cancellation or delay of several residential projects around the country. We have shifted business over the past two weeks to offset the loss of business on these canceled construction projects.

The branches quickly adjusted and are focusing on placing available workers on other projects in other industries. We believe with the tight labor market we could continue to place workers across the 400 different industry classifications which we serve. Same branch revenue growth in our CLP offices was over 10% for the quarter, and actually trended up as the quarter progressed. Keep in mind that CLP's business mix is largely commercial construction. Commercial real estate activity remains strong across most of the country.

Similar to tight unskilled labor markets with the tight skilled labor markets our branches have the ability to shift those trades people from residential projects into commercial projects. It only takes a short amount of time and planning to shift these workers into other jobs. Skilled or unskilled we are finding the same opportunity to make this shift in business mix.

We have continued to find leverage in our operating model at the branch level. Although we had some additional expenses during 2006 that impact our leverage, the costs were primarily related to incremental stock-based compensation and CLP's higher cost structure which caused the blended SG&A to increase over the past year. The increase due to CLP is behind us, as those operations have now been in our results for a full year.

In addition, we've had some slight incremental costs over the past year related to building our sales force in certain markets and rolling out our successful safety and risk management programs nationwide. These programs are driving higher revenue growth from the sales force and lower costs by reducing accidents.

Our three main strategies in place to sustain our revenue growth and our net income growth continue to be, first and most important, 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 about 3% of net income growth for every 1% of same branch revenue growth.

Our second strategy is to sustain our growth by opening new branches using a disciplined approach. We plan to open approximately 5% of our base in new locations each year. Therefore over the next five years we plan to open approximately 250 new branch offices. We planned to open 46 new branches in 2006, of which 40 have already been opened. These 46 branch openings include a mixture of Labor Ready, CLP, Workforce and Spartan Staffing offices. We remain pleased with the process of opening the new markets and our ramp up of these new offices remains on track.

Our third strategy to grow revenue and profits 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 of 2004 and the acquisition of CLP resources in May of 2005. We are pleased with the performance of these acquisitions. They have all made a positive contribution to both our revenue and net income growth. Through the execution of our strategy to grow through acquisition, we have not only provided above-average returns on invested capital, we have added depth to our management team, improved our own operating performance by sharing best practices across the brands and perhaps most importantly, we have established new regional platforms that we can expand and grow into a national presence over the coming quarters.

We will continue to monitor acquisition opportunities closely and approach them in a disciplined manner to ensure returns on invested capital and net income growth continue well into the future. In summary, our operating performance was strong overall this past quarter. We headed into the busiest season focused on the right things, growing revenue, controlling costs and increasing profits. Although there is some uncertainty in the economy, we believe that by serving 300,000 different customers in 400 different industry classifications we will be able to continue to redistribute our workers to those industries and customers that are showing strength. We remain confident with our business model and optimistic about the demand for both skilled and unskilled labor.

At this time I'm going to turn the call over to CFO, Derrek Gafford, for further details on our operating and financial trends.

Thanks, Steve. Good morning, everyone. The company produced a record second quarter due to growth in same branch revenue and a strong gross margin in comparison with Q2 a year ago. Gross margin for the quarter was 32.2%, an increase of 80 basis points over Q2 2005, and about 100 basis points above our expectation for the quarter. The increase in gross margin compared to Q2 last year was primarily driven by a decrease in workers compensation expense this quarter. As bill rate increased 3.9% and pay rates increased 4% during the quarter.

Now there are a few specific items I want to address in regard to work comp. The first item pertains to the 80 basis point increase in gross margin this quarter in comparison with Q2 last year. Our actuary lowered reserves established in prior periods based on the consistent downward trend we have continued to experience and the number of accidents and the cost of claims. This adjustment was about 30 basis points more than the adjustment we received in Q2 last year. Also our current year run rate for work comp is about 50 basis points lower than the run rate in Q2 last year.

The second item is the total amount of adjustments this quarter related to prior period reserves. This adjustment was approximately 100 basis points this quarter and without it gross margin would have been about 31.2%. Now I am going to move forward and discuss our margin expectations for the future. Our safety programs continue to produce industry-leading results. Our accident rates for the first half of this year have decreased about 15% compared to the first half of 2005. We expect our run rate for work comp over the next two quarters to be about 6.2 to 6.6%, producing a gross margin for the second half of the year of about 31.4%.

Selling, general and administrative expenses as a percentage of revenue was 23.4% for the quarter, excluding incremental stock-based compensation and the blended SG&A impact of CLP, SG&A for the quarter would have been about 90 basis points lower or 22.5% compared to Q2 a year ago of 22.4%.

Now let's cover our expectation for these two costs for the remainder of the year. For incremental stock-based compensation we expect 20 to 30 basis points of additional SG&A in comparison with the same period a year ago. For CLP we expect a blended impact on SG&A to decrease over the remainder of the year. Q3 of this year will be our first quarter where CLP's costs will be fully reflected in the same quarter a year ago.

Now let's turn our focus to SG&A for the year as a whole. We estimate SG&A for the full 2006 year to be approximately 22.7 to 22.8% of revenue, a decrease of about 40 to 50 basis points from the prior year. Net interest income improved to 0.9% revenue compared to 0.2% 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 of 2005, as well as increased yields on invested cash. Net income improved 21% compared to the same quarter last year resulting in net income as a percentage of revenue of 5.5% compared to 5.2% for Q2 last year.

The Company repurchased about 2.2 million shares of its common stock during the quarter. The stock repurchases resulted in a decrease in the weighted average number of shares for the quarter of approximately 750,000. This increased earnings per diluted share for the quarter, net of lost interest income, by less than $0.01. The purchase of these shares completes the Company's current buyback authorization. Our income tax rate increased to 38.5% compared to 38.1% for Q2 a year ago due to the expiration of the work opportunity tax credit at the end of 2005. Our income tax rate for the year 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 third quarter of $0.45 to $0.48 and for the 2006 fiscal year of $1.33 to $1.38. Our guidance includes a weighted estimate of about 53.5 million diluted shares for the year as a whole. It also includes the impact of the shares repurchased in Q2 of this year.

The balance sheet remains strong. Cash and marketable securities were approximately $155 million despite the stock repurchase program conducted during the current quarter. Days sales outstanding in accounts receivable was approximately 34 days this quarter compared to 37 days for Q2 a year ago. DSO for Q2 a year ago was high due to the purchase of CLP last year. Our DSO calculation for Q2 of last year had only one month of CLP sales since the purchase date was at the end of May 2005.

Cash flow from operations this quarter did not increase at the same rate this year as Q2 a year ago for two primary reasons. One, the implementation of FAS 123(R) this year requires the majority of the tax benefit from stock options to be classified in cash flows from financing. Second, accounts payable decreased as we made payments on the legal reserve recorded during Q4 last year. Since the incremental operating profit from each additional dollar same branch revenue remains strong at 20%, we continue to remain focused on growing same branch revenue.

At this point we will open the call for questions.

(OPERATOR INSTRUCTIONS) Craig Peckham, Jefferies & Co.

Good morning, Steve. Good morning, Derrek. I wondered if you could give us a little bit more flavor for the sequential month trend, what we are seeing here so far in the third quarter and if you covered it already I apologize, I got on a bit late.

Thanks, Craig. We definitely, we had a strong quarter through the first eight or nine weeks, and about the middle of June we did see a step off in revenue, and we do believe that it was mainly due to some cancellation of some projects or some sell back in residential construction. However, with that fallback we've quickly stabilized only a couple points below the run rates that we had been seeing. So we hit this 5, 6% rate at the end of June and heading into July we are at about 6%, right where we've projected the third quarter. We feel pretty good about that projection given the fact that we feel we stepped off of maybe a small curve, not a cliff, but we stepped onto some pretty stable ground. And I think with the diversification of our industries we can serve, we are pleased with what we've seen in the last three or four weeks.

Jim Janesky, Ryan Beck.

Yes, good morning Steven and Derrek. I have a couple of questions. You said that residential accounts for somewhere around 10% or 15% of your overall revenues, and you do make the comment that commercial is still very strong. I am just wondering how we kind of justify that with that percentage there is, it caused your same-store sales growth to go down 25% between the month of May and June. Is it a timing issue of moving people around?

Construction is about 39% of our business. Residential we believe is about one-third of that 39%, and new housing starts are about one-third of that which gets us into the category of about 4% of our revenue comes from new construction. And that is the main part where we saw a fall off. Moving from 8% growth to 6% growth, a lot of it has to do with residential construction.

And what has been in the news and you see new home builders pull back 30%, 40% on their projects, we have felt that. The 25% movement is -- we're talking about a small step back in our growth rates. It does take a little bit of time to move those people around and both in our skilled and our unskilled divisions that are placing people in construction sites. But we've seen that movement and we are pleased with the run rates that we are currently producing.

Okay. That's helpful. The rest of or rather your outlook for the rest of the year does imply that that 6% kind of holds, and actually could even decline -- this is on the revenue line -- could decline into the mid fives for the December quarter. If this shift works and unless we go into a significant economic deceleration, do you think that that 6% same branch growth could start to inch up over the course of the year?

I will kind of answer that the way we always have. We are a quick moving company. We serve on demand needs. We serve what's in front of us now; we don't have long-term contracts. And so the activity at any point in time over the last four to six weeks has always been a pretty good indicator of how the next quarter is going to turn out. So we feel very comfortable about Q3 and the 6% run rate. Could it improve? Could it accelerate? Yes. We've always hit our revenue target within a few million dollars based on this method of projecting. Going into Q4 we just take a longer term view, plug it into a model that tells us what our annual revenue is by week, and it kind of gives us a longer-term outlook. But really the next 10 to 13 weeks are where most of our focus, most of our estimates we feel solid in that area.

Okay. Thanks a lot.

Michel Morin, Merrill Lynch.

I just wanted to clarify your June same-store sales figure, that includes CLP, correct?

Yes, it does.

And you mentioned that CLP had trended up slightly during the quarter. Can you give us a bit of color around that?

CLP did trend up. They were in double digits for the quarter as a whole on same-store sales. They came into our companywide same-store sales calculation in June which did help our June same-store sales numbers grow. The number I quoted earlier of 6.4% was CLP helped our overall number there.

Right, okay.

That's okay because CLP is construction based company and if there is fears around construction the fact that our construction division is holding our same-store sales up is actually a positive thing.

Right, so effectively there is perhaps a bit more of that exposure to residential in the traditional Labor Ready segment I guess is what we should take away from that.

There is one pocket of our company that has seen economic growth for the last 10 years and is finally seeing some softening and that happens to be Florida. And Florida hasn't diversified, hadn't the need to diversify much over the years, and they've gone through a learning curve the last four to six weeks. And I am very pleased with the learning curve they've gone through but there was a little slower moving there, slower four to six weeks; we are an on demand company, we usually move quicker than that. But I think we have Florida figured out; I don't think Florida is going to cause us problems. It is not growing at 30% like it had been. But all in all we are pleased with what we've seen here that we've hit some solid ground in July.

Were there any other geographic observations you would make in terms of maybe some regions doing perhaps a bit more poorly than you would have had thought? And I wonder if you can also comment on the UK business because I think you had hit a soft patch a year ago in Q3 so you're going to be anniversarying that in the third quarter and just your thoughts on how that might help the comparisons would be helpful also. Thank you.

Okay. Well, as far as other regions go, we had seen some softness in Southern California earlier in the quarter, and they responded quickly. We went through a 2, 4, 5 week trend there in Southern California much like we were currently seeing in Florida. We do believe that it was some shift in some residential projects then and our team shifted out of that into other industries, and we're growing nicely in Southern California again. I think that gives us the track record, the confidence that this can be done. So that region's geography is performing nicely.

The Northeast has had some softness. Now the weather in the Northeast this year has been terrible, and it continued clear into the second quarter. It continued clear into the end of May, so we finally have come out of a point where we are not flooding and it's not storming every day and we are seeing some pickup in the Northeast. I don't -- it is hard for me to relate how much of that is economically driven to construction because that weather was so bad in those areas that seen the largest decline. We're getting back on track and hopefully we will pick up our momentum there. Other than that things are fairly stable.

As far as the United Kingdom goes, we've been working through those issues for a year. United Kingdom had a bad 2005, both economically the country and Labor Ready's results didn't perform well very well in 2005. We've been a new team in there. They've hit the ground. I think our training and our focus on where we are selling our business has made a turn, and it is spotty right now. We show a little growth; we show a slight decline, but that's okay. It is stabilized. We're going to move forward from here. So I think we're right on track with what we expect out of the UK right now.

Mark Marcon, Robert W. Baird.

Just wondering with regards to the gross margins I'm assuming that for the second half you're not assuming any sort of workers comp accrual reversals, but those could potentially continue, could they not?

Yes, they could continue. We've been on a period here for the last year and a half of seeing some great improvement in workers compensation, our safety teams and our operations teams have just done an outstanding job here. The guidance that I have given you is a 31 point [floor] reflective of work comp dipping down a bit primarily related to our run rate for this year dropping down because of what our accidents are at this year compared to last year, a 15% decline.

So there is no accrual reversals built-in or assumed?

We don't project those in.

And then with regards to the SG&A, can you talk a little bit about the marketing programs that you have and the safety coordinators and what is the impact there? And at what point should we start seeing once we anniversary the stock comp, when should we anniversary an accelerated level of SG&A so that we can go back to our traditional leverage?

Mark, we started those sales teams and added in a few sales headcount in September of 2005. We also started the rollout of our safety, additional safety teams, and grew our safety department from about four people in June of 2005 up to almost 20 right now, and that has been a big rollout. We've probably added about 40 salespeople over the last year, and so thus that is additional headcount of 60, 65 people in not the lowest paid positions; these are $40,000 a year jobs that we've added. We are coming up on the anniversary of starting those programs. They were ramped up through the fall and into the spring of this year. We might be six months on average into that. But that's only running about 30 basis points of our leverage. The first big issue is CLP and we have hit our anniversary on that. So that will help our leverage look better going into Q3. At the same time their revenue is growing and they are getting good leverage out of their cost structure, so it is not only the blending gets better, CLP, we are hitting the strategy we wanted. We bought a regional base company, we are taking them to a national presence, we're leveraging more revenue through that fixed cost structure that we bought, and they are providing great leverage on their own.

Then that last area of when will we actually see the leverage come back, well we see a little bit come back in Q3. We were -- costs were 100 basis points above prior years on revenue. Going into Q3 we see it close to flat, maybe even a little bit 20 or 30 basis points of leverage. So that's a pretty good swing right there. That we come back maybe 100, 120 basis points of leverage showing up in Q3. And by the time we move into '07 I think we won't have this; we won't have additional stock-based compensation. We won't have the CLP impact. We won't have the large rollout of the safety and sell teams. It will just be incremental as we see fit from there forward. So moving into '07 we should be right on track with our leverage model.

Okay, great. And then what have you seen in Texas, Nevada and Arizona? During the quarter?

Texas has been our strongest market, and we have been pleased with our performance. Part of it is the leadership that we've put down there; we transferred one of our best down to Texas about a year ago to run that, and he has put together a dynamic team. Also we've just seen great economic activity out of Dallas and Houston and along that, the eastern part of Texas where the hurricanes came through, there was some good cleanup of that this spring. But we just had seen some good results out of Texas and good economic activity down there.

And Arizona and Nevada?

Arizona is doing quite well. We haven't seen a huge pullback there; actually I was just checking the results over the last few weeks and we've seen 25% growth over the last few weeks out of Phoenix. That is a great indicator for us that we are addressing the right things there. You talked about Nevada, and Nevada has been a little bit spotty. Between Las Vegas and Reno we have had some wins, we've had some losses, but as far as pure construction growth, I think we're still on fire there also.

Okay, Steve in terms of thinking out a ways, one of the great attributes of your business model has been and the management has been how disciplined you have been. Given that it seems there is some concerns about what the economy is going to be like over the near-term, how are you -- how is that factoring into your plans for next year? And a related question to that is in the markets and in the branches where you might actually see same branch revenue declines, how does that work in terms of what are you able to do to reduce the costs within those branches to adjust for lower revenue levels?

The first thing that comes is two things, we have a strong pay for performance system at Labor Ready, so our bonus systems are tied to net income growth, and just as they make a lot on the way up, it adjusts quite quickly on the way back down. That pay for performance system. So that is the first thing. The second is we run a tight staffing model here. As you're stepping into revenue growth, we give you a certain number of customer service hours to run that branch. As it steps back you lose those customer service hours. We have a nice accordion effect on our variable cost there. That is within one given branch. Now any given market we also have clusters of branches, and we can still take the opportunity to consolidate branches if it makes sense, if we can still serve our customers and not make an impact to our overall -- if we make a positive impact to net income we will make those decisions depending on by market what the economic activity is, what the size of each branch is, who the team is, where the branches are located, but that is on our radar system. We watch that closely. We know which branches we would go to, but we don't jump there first we want to make sure that we have good indications and where each market is going to. But first it is within the four walls of the branch like I mentioned, those variable costs that have an accordion effect to them.

And I'm assuming you're going to be flexible in terms of how many new branches you open next year and you will watch the trends in terms of the size.

Obviously that's one of the first places we go is cut back on new expansion especially in those markets that are struggling. But that is one of the reasons we shifted to a strategy of only opening 5% of our base. So at any given time we don't end up with a large portfolio of branches that need closed. So we don't find ourselves with that right now; we don't see a lot of losers out there. We don't have a big list of closures that would save us millions of dollars because we have been very disciplined in opening these offices. And we will remain disciplined so you call that one out that if it doesn't make sense, we are surely not going to open new offices.

Great. Thanks.

Mike Carney, Aperion Group.

Several questions. First, I want to clarify, Steve, did you say double-digit comparable growth at CLP in the second quarter?

Yes, in the low double digits. And it spiked a few of those weeks even above that.

So that is still very strong growth. And then in April and May overall that I assume would be 9% same branch sales growth?

For the Company as a whole?

Yes.

Yes, I think the numbers I gave for same branch for April was 8.6, and May was 8.5.

And then Derrek, you said assuming assumption for SG&A or operating expenses was 22.7% to 22.8%. And so clearly then that's going to assume some leverage in the third and fourth quarter then?

Yes, there is some leverage built-in there.

Or declines in terms of percentage year-over-year though --.

Yes, if you are comparing to the full year last year, absolutely. I think it is about 30, 40 basis points.

So I guess a lot of that, a lot of the kind of increased or lack of leverage has been CLP. And is that due in part I assume to new branches that have opened that are not profitable cause revenue doesn't ramp up?

Let me hit a couple of things there. The big chunk of the lack of leverage that we've talked about the last two quarters is stock-based compensation incremental and CLP. And specific to CLP keep in mind in Q1 this year we've got all of CLP's cost structure that is not in the previous year's cost structure. SG&A runs higher than ours, in Q2 we had two out of the three months that where we had CLP not in our previous period cost structure. So those are two of the items that where we haven't had apples-to-apples with the previous year. Also, as we go into the third quarter as far as leverage compared to the other three quarters of the year our leverage runs stronger because third quarter is a higher sales quarter for us. That is our busiest time of the year. So we can't really straight line leverage necessarily between all four quarters.

Okay, and Steve you mentioned, I think Mark were talking about planning. You are opening six new branches in the second half, which typically try to get everything done in the first half, so when is it a good time if there is some slowing growth even though it is not a whole -- not a big slowdown, to really cut back on branch openings since they are unprofitable in the short-term? And are those six branches -- I assume those six branches would be in strong markets that you are opening.

That's right. Those offices are primarily Spartan offices that are left to be opened; our offices in on demand additions we try to get those open in the spring. The Spartan offices we open throughout the year, so the remaining offices to be opened are in that category. Now the Spartan offices have been ramping up nicely, so to pull back on that division when that is not the division that's under pressure I doubt you'll see us do that this fall. Those six openings will go forward with that.

When we move into planning '07 we will definitely be taking into account what market trends look like, and obviously we are only going to step into strong markets where we feel like we could take a significant piece of the marketshare quickly and ramp up. And as we were talking about that a little earlier, we will make those decisions based on brand momentum, market demand, economic trends that we see and we don't have to make those commitments a long way in advance. We are comfortable right now that we are not too far ahead of ourselves on 2007 planning.

And then in, I believe it was May or so of '05, you had a month that was significantly lower than your typical comps of like 4%. And I believe it was manufacturing activity that just happened to be below in that month. Is that somewhat -- I mean is there a correlation to what you saw in June where it was down to 5% or 6% compared to 7% to 9% that you quickly ramped up in '05 and continued in '06?

It does look a little bit different. When we went through that in May it was a broad based pullback. This time it was more pocket related. We could tell that it was really due to construction projects being delayed, and so it does look a little bit different than it did in May of 2005. However, we responded nicely to this pullback in the middle of June. There for a couple of weeks we didn't know what was coming and obviously the way that we regrouped and reallocated where to send these workers that we found a stable base to step onto. And in that regard the fact that we don't have long-term contracts in all of our business we have a steady flow of applicants and workforce, and we know how to put these workers to work that we quickly made the shift. And I really do believe we are onto a stable platform across 300,000 customers and 400 industries. And I believe that that is what's making a difference to our stability now. I don't know what May of '05 and why that dropped for a few weeks and why it dropped back; the economy is just sometimes spurty like that.

But that was a broad based kind of deceleration in economic or market growth, and this time it was much more related to one specific industry, construction.

That is our gut feel on it right now, yes.

Okay, thanks a lot.

Andrew Steinerman, Bear Stearns.

I just wanted to revisit a comment that I think was made in reference to Texas; I think it was relating to hurricane cleanup helping you out in the spring. Is it possible that part of the step-down and growth in June was as to cleanup benefit of the spring came off?

I don't believe that that is related in that direction. I do believe that it is related to the projects that were canceled in June. We've taken our step back; we found a stable base to go forward on. I don't do believe it was due to cleanup projects.

When you think of the benefit that you got from cleanup projects you do think about the spring, and not as much the summer, right?

Right.

Thanks for the clarification.

Jeff Silber, BMO Capital Markets.

Thanks so much. Just wanted to clarify a couple things. You mentioned some of the weakness in Florida. Roughly what is Florida as a percentage of your business?

It is approximately 7% to 8%.

Okay, great. Now also just a clarification on the guidance. The guidance that you are giving for revenues is for the current quarter assumes roughly 6% same-store growth. Is that the same thing you're looking for in the fourth quarter to get to your annual guidance?

Yes, we are looking for stability in that. It is hard for us to go out into Q4 and say it looks any different than Q3.

I understand that. I guess what I'm looking at, I am looking at the comparables to last year and Andrew had brought up some of the Katrina related cleanup. It looks like you had a bit of a pick up in business toward the end of the fourth quarter in '05 because of that. Would it make sense to maybe dial down expectations in the fourth quarter just because of those year-over-year comps?

Well, we don't believe that that was real significant. I think we've quoted that maybe 1% of our same-store sales in Q4 last year came from that. So it might be slight, Jeff, but it is hard to say and again we can remobilize those workers into something else.

Okay, that's fair. Would the company be considering another share buyback at these prices?

Absolutely. If it was a good price this quarter, it is going to be an even better price now. We still have -- stay true to our capital plan though, and as we move through the way we look at projects we are looking for further diversification when it makes sense. If we can move into one of these other areas that is growing that has been on our radar we will take a step as long as we can do it in a disciplined approach. Two, we would step into a share repurchase program, and that is a great use of our capital. And so I think it is a valid question.

Okay, great. And a few numbers questions. What was workers comp expense as a percentage of revenues for the second quarter?

It was about 5.6%.

Okay, and I know you normally give us the change in sales by the different line items and you kind of said they all offset one another. But if you happen to that handy is it possible to get the impact of new branch openings, branch closures and currency and other stuff? If you don't I can always follow up later.

Yes, I've got it right here. Same branch revenue growth, 7.9%; new branches, 1.3%; closed branches, -0.9%; acquisition growth related to CLP for the first two months of the quarter, 7.3%; and then a shift in the holiday related to Easter about a -0.5%.

That's helpful. And you mentioned the workers opportunity tax credit. I don't know if you have an update on that in terms of where that stands, is that coming back, do we have any indication?

I don't have any indication on whether it is going to be passed or not this year. It has typically when it has been passed, has been in the second half of the year. When it comes to the work opportunity tax credit it is a bit of a political bill that I have not witnessed since I've been here get passed in the first half of the year. So I don't have a specific update, Jeff, on timing.

And if it does get passed, just to get the mechanics is that something you'd adjust your tax rate in the third quarter or we would adjust retroactively the first and second quarter as well?

At the date the tax bill changes if that happens in third quarter our tax rate will adjust at that time period, and the impact for workers opportunity tax credit on the tax rate for the year is about 50 basis points if it was to pass.

That was my next question. Thanks a lot. I think I am done. Thanks.

Clint Fendley, Wachovia Securities.

Steve, I wondered if you could talk a little bit more about the shifting of the workers from the residential to the commercial, how has the receptivity of your customer base been so far to this, and how might the skill sets differ between the two areas?

Well, the customer base is thrilled because these commercial projects are looking for workers just like the residentials were, and especially in some of these high-growth areas where construction has been so strong there have been pockets of worker shortages. And so when there is a tightening of the labor, whether it's skilled or unskilled, and we have a customer we've been serving for some period of time and we may have five workers, 10 workers out on their job site, and then they tell us that certain projects have been canceled and they are only going to need two or three workers now for a while, we can take those other five or seven workers, call up one of our commercial clients and say we're ready to go, give us a call. Call a multitude of other industries and that is kind of how it works. Now it doesn't shift on the exact day we get news, but it is pretty easy to shift it over a two or three-week window.

That's very helpful, and I guess switching gears here, historically you have closed more stores during your second half. Have you given any thought to how many branches you might close this year? Is it any different I guess given --

I don't think the run rate is extremely different right now. We have a little bit of cleanup to do, but if it is three or four offices that is probably what is on our radar screen right now. And that is if we are opening six and we close three or four that is probably what our expectations are but we don't have a big list lined up. If that's what you are asking about.

Got it. Thanks, guys.

Jim Wilson, JMP Securities.

With all the questions pretty much everything has been asked. I was just going to say, though, on the business segment mix as opposed to regional and obviously we focused on new construction, all the construction components, (technical difficulty) anything else stood out that looked particularly good or you see particularly bright prospects for other segments? I don't know if it is something that is coming out of Texas, or the rest of the Southwest, seems pretty apparent is doing well or improving.

The other two large sectors, there are a couple here that are bright spots. One is the transportation and warehousing industries continue to need people. The amount of product flowing line through this country is high, and we have been servicing those industries stronger and stronger over the years. That is a big play where our new division of Spartan Staffing comes in and they are only in 30 or 25 plus markets. But our goal to expand them and get them into the high manufacturing or at least the high distribution transportation markets, that is high on our radar screen to do that.

I was just handed a note here that the number I quoted for Florida was only our on demand division. If I add Spartan on top of that it's about 12% of our revenue comes out of Florida. However the Spartan division has been flowing very nicely. That has been a great growth engine for us. So as we continue to look at other industries to serve, some of it does come from our on demand division but a big chunk of it is coming out of this new venture, Spartan Staffing. And we are firing on all systems, all cylinders there.

Okay, good. That's confusing and that is that the world seems to think you're a lot more single-family construction related. You know in the commercial side, which is I guess that works out to like 26%, can you break that down as to what is actually new building activity versus maintenance, cleanup, landscaping, all those other things that are fairly recurring?

Probably in just broad terms, Jim, we would have to stick with our approximately one-third might be new commercial. The other two-thirds can be remodel, cleanup.

Maintenance kind of said, okay.

Maintenance, yes.

Makes sense. All right. Thanks.

Jim Janesky, Ryan Beck.

My follow up question has been answered. Thank you.

Craig Peckham, Jefferies & Co.

Steve, as you look out at the economy and you use the word uncertain in the press release I saw a couple of times today, can you give us a bit of perspective on how the firmness in the economy or however you may perceive it, how does that influence the acquisition strategy in terms of Labor Ready's demand and I guess on the other side of the table, the interest level and possible sellers?

Well, as we've talked about our diversification we wanted to get into light industrial, transportation, more into the services events and skilled trades. So we've executed the CLP deal a year ago. Where into the skilled trades. They're growing nicely. They're on track. We bought 51 offices. We now have 67. I don't believe that we will be, that we need to do another deal in skilled trades. I think we have the regional platform that we can take nationally, and then we control the speed that we do that based on economic conditions. Now Spartan is our entry-level into the light industrial, transportation, warehousing. That is even hard to call a regional because they were Florida-based, they had nine offices, we plan to have about 30 by the time we finish the year. That team is doing awesome; their growth has been spectacular, their ramp up rates have been great, which just confirms that is a great strategy for us. We're going to stay true to that one. They are stronger than normal gross margins for the light industrial world. They're serving smaller accounts like we know how to take care of. We've blended them into our support services very nicely, and I think we are all guns (indiscernible) in that area. I believe we can grow that business much like we're doing CLP. The team is getting stronger, and again we have a strong Southeast presence, which is a great place to start with light industrial especially serving smaller businesses. I think you're going to, as long as we see the indicators going forward, a lot of our expansion will be in transportation, warehousing, light industrial. And I believe we have been establishing the team to make that happen. And maybe that is where we will go forward. Could there be another acquisition in that arena? Yes, but only at a disciplined approach that we can get the proper return on invested capital that we need; we are not going to jump at an opportunity just to jump. What's going on in the selling side? I don't know. A year ago everybody was pretty excited about it; I think there are a few more sellers coming to the table. I don't know what that says for pricing. But again, we're going to focus on growing that organically until we get the right deal.

It does not sound to me as though any of this uncertainty is influencing the acquisition strategy from a timing standpoint.

No, we're pretty patient company team and it is very much supported by our Board of Directors, that angle. We are not going to jump at an opportunity and overpay or get into a deal that doesn't make sense for us. We very much got the long view in mind, and will things tighten up, will that change our strategy? Those are short-term decisions. Long-term we haven't changed one bit, Craig, we're very focused on our long-term strategy here. Will that affect the timing, one quarter, two quarters, six quarters? I don't know. Those are smaller decisions to me. Over the life of Labor Ready and where we are taking it and trying to get the return on our invested capital, I don't think it changes our strategy right now.

Mark Marcon, Robert W. Baird.

Most of my follow-up questions have been answered, but I was just curious in terms of Southern California where you reallocated the workers, where did you reallocate them to?

Those workers that might have been out on new construction sites or were out on construction sites, the softening happened quickly. The team readjusted and they go to a multitude of places; there's not just one industry. When you have available workers standing in front of you the phones are ringing, we are diving out, our sales force gets busy, that doesn't mean we are not doing that all the time, but when you have a huge available workforce in front of you within a 5 to 10 day window, a 15 day window, you can get those workers placed. So I don't have exact industries, Mark, but I do know that it was more into transportation, warehousing and the services businesses.

And you did say that in Florida things firmed back up in July?

Well, they stopped shrinking. That's what stable means to me. So we had a falloff, it stabilized quickly, it was a certain chunk of revenue that we lost, but it was not broad-based beyond that, and the team is very motivated and has been reengaged in conversation about how to get this workforce placed into the various industries.

And so would you say that ex construction that the trends have basically been the same as they always been?

We're feeling pretty good about that, yes.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Are there any closing remarks?

Yes, we appreciate everybody's time on the call today. And I think that we've talked about the right things here, and you've asked the right questions. We do want to reiterate that the falloff, the future projection of 6% same-store sales going forward versus 8% and versus 10% that we had seen in the first quarter, that we did see it in the residential construction area. But we have seen a strong stabilization, and we were very confident in the business model and the fact that we serve multiple industries and multiple customers and we're very excited about the opportunities that lie ahead for us. We appreciate your time on the call today. Thank you.

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