TrueBlue Inc (TBI) 2006 Q3 法說會逐字稿

Good morning, everyone, and welcome to Labor Ready's 2006 third-quarter earnings conference call. Today's conference is being recorded.

Joining us today is Labor Ready's CEO and President, Steve Cooper, and CFO, Derrek Gafford. They will discuss Labor Ready's third-quarter earnings conference results, which were announced earlier today. If you have not received a copy of this announcement, please contact [Lisa Wytrail] at 1-800-610-8920, extension 8206 and a copy will be faxed to you.

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

Thank you. Here with me today is Labor Ready CEO and President, Steve Cooper, and CFO, Derrek Gafford. They will be discussing Labor Ready's 2006 third-quarter earnings results, which were announced before market open today.

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 Steve, I ask for your attention as I read the following Safe Harbor.

Please note in this morning's conference call, management will reiterate forward-looking statements contained in today's press release and may make additional forward-looking statements related to the Company's financial results and operations in the future. Although we believe that the expectations reflected in these statements are reasonable, actual results may materially different (sic). Additional information concerning factors, which could cause results to differ materially, is contained in the press release and in the Company's filings with the Securities and Exchange Commission, including our most recent Forms 10-Q and 10-K.

I will now hand this call over to Steve Cooper.

Thank you, Stacey. We're pleased to be with you this morning. This morning, we reported revenue improved 4% over a year ago. Net income growth was 14%, and income from operations improved 8% over that same period. This was really driven by stronger gross margins of 32%. And as Derrek will visit with you here in a bit, that really came from further improvements in our workers' compensation.

Other costs were in line with expectations. As a percentage of revenue, they have trended up this year. However, that was expected. We've opened 48 new branches this year. And we have additional costs from stock-based compensation, all which was planned for. So, our SG&A really is in line; although, the percentage of revenue doesn't look on trend with how we were performing during 2005.

When we started the year, our initial outlook for revenue was $1.38 billion to $1.40 billion with net income per share of $1.30 to $1.35. Our current estimates put us right in that range for net income per share. However, our revenue is now estimated to be below that initial range that we came out with about a year ago. Obviously, it's hard to look out a year ahead and determine exactly where your revenue growth is going to put you.

Really, what is flipped there for us to be able to meet our net income per share guidance is our margins have been stronger. However, that margin improvement has really all been in our control. We have had great safety results this year. We have continued to put up great safety results all the way since 2003. Our pricing controls in our business are strong. Our wage controls are strong. The gross margin improvement that we have seen over a year ago has all been definitely within our control. And we're very pleased about that.

Now, the same-store sales trends have not been so exciting. We're not pleased with that. In quarter 2, we had 7.9% same-store sales growth. In Q3, we are at 1.7% same-store sales growth. When we reported the second quarter in July, we had estimated and told you that the same-store sales growth had come down slightly. And we had actually seen some stabilization between June and July, and we reported on that. However, the last part of July, things did worsen slightly and our same-store sales growth fell off a little bit further.

However, over the last 10 weeks, really from August -- the first part of August through current, they have been fairly stable. In our business, that is within a point or two of each other. So, really, July came in at 2.4%. Keep in mind the first half of July came in a little stronger than the last half. And since then, August came in at 1.7%, and September came in at 1.2%. And then, the first part of October, we are a little bit stronger than 1.2% but again not materially, right around this 2% number on a same-store sales basis.

A lot of this has been driven by the pressure in the housing market, the new residential construction that we talked about in the second quarter. Really, that is driving our results as of today also. It's not just housing. There are related services that go along with housing. There's equipment rental, subcontractor supplies, the supplies that go into new housing and other business services.

The bulk of this has been in the Southeast -- our Florida operations and the Carolinas, a little bit in Georgia. But really, our Southeast region has been our hardest hit.

We saw the same trend in Southern California back at the first part of the year. Our Southern California operations led the way. They turned things around. They went out and changed up the business mix. We talked a lot about that on our second-quarter call of what does it take to change up the business mix? How do we do that?

We really refocus our teams in where they can put these workers to work. There's plentiful amount of workers out there. There are businesses that are still growing. There are other industries that are still growing. We serve 400 industry classifications, so this gives us the opportunity to take workers from canceled projects and get them back to work somewhere else.

Now, it doesn't happen overnight. We have to get back in touch with various customers. We have to refocus the sales force. But we have 90 district managers in our on-demand division that are all well-trained in this area. We have a leadership structure that is able to hold meetings, new training sessions, get the message out quickly.

Our information systems give us our information quickly. Every Friday, we have got a good close. And our leadership teams are meeting on Saturdays; they are redirecting their teams.

Southern California bounced. It took about six or eight weeks, and things look great. It's one of our strongest divisions right now.

Now, let me talk about Florida a bit. That hit us hard in May/June time frame. And what happened in Florida is we also took our teams down there, redirected them. Now, the Florida situation was a little different than California in the fact that Florida had grown nicely over the last three to five years. They hadn't seen a significant slowdown -- a significant pullback, and the teams weren't as agile.

However, we have applied the same process where we reteach them how to change up the business mix, how to hold these meetings and how to refocus and get these workers back to work. And I'm very excited to tell you that we have certain branches that were hit hard in May that are showing great resilience, and they are showing some good bounce back. That is exciting to us. It tells us that what happened in California can happen in other areas.

Now, were we as prepared as we should have been? Absolutely not. This housing market thing happened quickly this summer. I think it shocked not just us; I think it shocked the entire economy. And we are responding as quick as we can to that. We've got a great business model. We've got an operations team. I stand by the fact that our leadership team and our sales leadership is as strong as we've seen in the history of this Company, and their resilience and their ability to readjust is coming through nicely.

Now, I've spoken to some regional differences that the Southeast is being hit the hardest. The Midwest is really performing much like it has over the last couple years. It has never shown great strength, and it has never shown huge fall-off. It has been a bouncer for the last couple of years. And that's what we're seeing in our Midwest operations still, that they show moments of growth yet some fall-off.

What happens in some of the Midwest territories from our perspective and what we have seen is we show some great growth and then we lose a large customer. And a large customer for us is somebody that is taking 30 or 40 workers a day, and they might be coming out of one branch. And that branch is servicing that customer hard.

There's two or three different reasons that we've lost some of our large customers. They are not large enough that we can actually pinpoint it or talk to you about it here today. But if you have a branch that is putting so many workers out a day and they lose a large customer, it might be that some of the reasons we've seen is they've hit their own financial difficulties. They've pulled back a bit, and temporary worker goes by the wayside. But we've seen a couple of them file bankruptcy. And then, one of the other trends is consolidation in the business world out there. Some factories have been shut down.

Now from the labor perspective, that's not a large piece of our business. But, it is one of the reasons that we are showing spurts of growth in the Midwest. Our day laborer operations -- the day in and day out placing two workers for two days, that business is growing. What kills us is we lose one of these larger customers.

Now, that's also why you are seeing our gross margins go up. When we lose some of these larger customers, it pushes our average gross margin up a bit. And that comes through nicely, and it comes back to pricing controls, wage controls. And yes, part of our gross margin strength is we're at comp growth that we've been -- we've had some fabulous safety trends. But this idea that our business mix is shift from these larger customers of 30 or 40 workers that the gross margins might be 5 points less, that shifts our business. And that has moved our gross margins up to 20, 30, maybe even 40 basis points from time to time. Then work comp has also been good to us.

I want to report that things are going very well at CLP Resources, our skilled trades division, and with Spartan, our staffing division. Now, those are smaller. It's only about -- the two combined are about 15% of our revenue. But, those two divisions are growing nicely. They are growing well above our trend of the whole Company, and we're very pleased with their performance.

The United Kingdom is doing very well. We struggled during 2005 in the United Kingdom. And at this point in time, we are showing good growth over there. We sent over a new leader -- a new person took that over about a year ago and actually moved over there this summer. And leadership on the ground really does make a difference. We're very confident that we're going to continue to make headway in the United Kingdom. We're not opening new offices there yet, but we're just getting it back to a point of stabilization, which we've kind of been on our hills the last 18 months. So we are forging ahead there. We are excited about that.

Now, moving forward, we've talked about three strategies to grow our business -- first being growing same-store sales. We're not giving up on that. Our same-store sales have fallen off, but we're still excited about that. That really is the point here. We can get great leverage out of growing same-store sales. Although, this 1.7% isn't overly exciting to us, we feel very confident that our business model can continue to grow. Our average branch volume is at $1.4 million right now. We believe that we can push that to $2 million and beyond.

Actually, we've been saying that our productivity levels are around 50% in our business and they are just slightly over that. We believe that by building a strong sales force, continuing to build our training of our leadership development and organization, we can move our average branch volumes to $2 million and beyond.

So, same-store sales continues to be our number one strategy. We're not giving up on that. There are many bright spots out there that excite us.

Two, we've talked about opening new offices. We opened 48 offices in 2006. We opened 40 -- and we plan to open about 40 in 2007. We will have more details on that at our Analyst Day meeting in November. Our long-term strategy is to continue to open about 5% or so each year in new offices. We are not pulling off that strategy. There are great locations to move into, especially with the two new platforms that we've bought -- CLP Resources, our skilled trades division, and Spartan, our light industrial division -- many, many geographies to move into. And we believe that we can forge ahead.

Actually, our new openings this year have been our bright spot. They've ramped up faster than they have over the last two years. So, even with a tough economy out there, there are great locations to move into and we're very excited about it. We're not losing more money in those new operations than we planned where it is actually slightly better. So we remain very confident about strategy number two.

Now, strategy number three is diversifying our business, and we've done that through acquisitions. I've talked about CLP Resources and Spartan Staffing here with you for a bit. But, we plan to further that diversification. It will really be driven and anchored into three things. One is staying in a blue-collar focus. We don't plan to continue to -- we don't plan to expand outside of the blue-collar niche.

Right now, we operate two brands inside the on demand -- Labor Ready, which has been our core business, and Workforce, which came along with an acquisition in 2004. Outside of that, our diversification is kind of in skilled trades, which we bought CLP Resources in May of 2005. And as I reported up in same-store sales when I was talking about that, they are doing very nice. They are growing, and their new openings are doing well.

There are opportunities geography-wise geographically to continue to expand CLP. There's a couple of opportunities that we could possibly do, some acquisitions in that area also to push that niche forward. We believe that we can be the leader in that niche, which is one of our anchors. We want to be blue collar focused and be the leader in that niche. And again, like I've mentioned, it needs to be a growth platform.

So, as we look for other opportunities, we will follow those three principles -- staying blue collar focused, making sure that the company we buy is a leader and that it's providing a growth platform for us, both in a geographic basis and it can improve our current operations. So, I think you'll hear more about that as we continue to go forward.

We are a very disciplined company. We are not out there hurrying. That's why you don't see some big rollup process from Labor Ready. We're going to remain very disciplined in that area. We plan that when we get down the road that we will always be able to say these acquisitions have been very favorable because of our discipline. We will stay there.

Now, I know that we have a share repurchase program out there that we are authorized to buy up to $50 million through the remainder of -- actually, we plan to get that done through '06. We only bought $8 million this quarter. We plan to continue on that program, moving it forward. One of the reasons that we didn't buy more than we did is we are in the middle of looking at various acquisitions. And so, we are always constantly balancing our capital plan.

And no, we haven't announced anything, but we are active in strategy three, which is trying to figure out how to bring on a disciplined basis companies into this diversification strategy. So, we will always have to be balancing that in how we are moving through our acquisition strategy with how fast we're buying shares back. But our long-term plan is to use our capital that we are producing to buy companies that fit those three pillars I just talked to you about and buy our shares back on a very -- again very disciplined approach to that, exercising patience as we go through that process.

We're very confident in our business model and all the brands that we are offering -- that we are operating in right now. We remain confident that we will work through some of the slowdown in our on-demand division. We see 2007 stable at this point.

Even with the slight slowdown this quarter, we are moving into -- with our -- the estimates that we have out there are fairly stable with what we've seen the last 10 weeks. And moving into 2007, we know that our comps will get easier in Q2 and Q3 and beyond. So, possibly, Q1 will look something like Q4. But we will have more to share on that when we are with you when we talk to analysts on Analyst Day in the middle of November.

So, with that, I'm going to open up the call to Derrek right now, turn the time over to him to supply some further details on our operating financial trends.

Thanks, Steve. Good morning. Steve spent some time discussing our sales and business trends with you. I'm going to spend a few minutes talking about some of our more significant expense, balance sheet and cash flow trends during the quarter.

Gross margin for the quarter was 32.3%, an increase of about 100 basis points over Q3 2005 and about 90 basis points above our expectation for the quarter. This quarter is another example of a strong performance in gross margin due to a decrease in workers' compensation expense.

Bottom line, our operations and safety teams have just done an outstanding job in safety and risk management. Our accident rate has decreased about 15% this year compared to the same period a year ago. This decrease is on top of year-over-year decreases of about 10% experienced in each of the last three fiscal years. While we had some great success in this area, it remains a key area of focus for us in the future.

Now, let's turn our attention to our gross margin expectation. Our estimate for gross margin is consistent with the trends we have experienced throughout the 2006 year. For the fourth quarter, we expect gross margin of about 32%.

Selling, general and administrative expense as a percentage of revenue was 21.9% for the quarter compared to 21.2% in the same quarter a year ago, an increase of about 70 basis points. There are three items impacting SG&A this quarter that I want to discuss. The combined impact of these three items increased SG&A by about 50 to 60 basis points compared to Q3 last year.

The first of these items is the incremental impact of stock-based compensation.

Second is new branch openings. While the number of new branch openings this year as a percentage of our base is comparable to last year, it's important to understand that the mixture between the brands has changed. Over half of our new branch openings are in the CLP and Spartan brands this year compared to less than 25% last year. These brands have a higher initial cost structure and a longer breakeven period than the Labor Ready brand. However, the offices for the CLP and Spartan brands ultimately develop higher average branch revenue than the Labor Ready brand.

The third item is sales and safety teams. We have continued to add resources in both these areas during 2006.

Now, let's address our SG&A expectation for the future. We estimate SG&A for the fourth quarter of about 24.4% to 24.6% of revenue. The three items I mentioned earlier that impacted Q3 of this year will also impact Q4 this year. The impact of these items is included in our estimate for the fourth quarter and represent about 50 to 60 basis points of revenue.

Net interest income increased by about 40 basis points of revenue over Q3 last year. This was driven by increased cash and restricted cash balances as well as an increase in yield compared to the same quarter a year ago. Net income improved 14% compared to the same quarter last year, resulting in net income as a percentage of revenue of 6.6% compared to 6% for Q3 last year.

Our income tax rate decreased to 37.4% this quarter compared to 38.3% for Q3 a year ago. The primary driver of the decrease this quarter was the resolution of some state tax matters. Looking forward, we estimate our tax rate for the year as a whole to be about 38%.

Our tax rate estimate for the year includes a state tax adjustment we received this quarter but does not include the potential impact of the work opportunity tax credit being renewed. If the tax credit is renewed before the end of 2006, it would decrease our annual tax rate estimate by about 50 basis points.

Yesterday, we released diluted net income per share guidance for the fourth quarter of $0.29 to $0.31. This guidance includes a weighted estimate of about 52 million diluted shares for the fourth quarter and about 53 million for the year as a whole. It also includes the impact of the shares repurchased through the third quarter of this year.

Now, let's focus on the balance sheet and cash flow. The balance sheet is absolutely the strongest in the Company's history. Cash and marketable securities were approximately $160 million, despite the stock repurchased during the quarter and reaching the annual peak of our receivables. Fueling our strong cash position was year-to-date cash flow from operations of about $47 million this year, slightly down from the year before due to the timing of payments on various accruals.

During the quarter, the Company repurchased about 0.5 million of its common stock, totaling $8 million. This leaves about 42 million of stock available for repurchase under the Company's current authorization.

Our strong cash position and absence of debt provide significant financial flexibility to take advantage of opportunities in the marketplace. We continue to look for acquisition opportunities that -- one, serves small-to-medium-sized customers; two, have substantial growth opportunity; and three, fit within our niche of blue collar staffing.

Steve and I will be in New York City on November 15 to conduct our fourth annual Analyst Day. We will host a lunch and presentation with Q&A to follow. This event will start at 11:30 AM and finish up at about 2:00. If you're interested in attending, please give us a call and we will get the details to you so you can RSVP. At this point, we will open the call for questions.

(Operator Instructions). Craig Peckham, Jefferies.

Two questions -- first of all, can you give us a little bit crisper sense for the magnitude to which the residential portion of the business has been down here in the third quarter? Kind of update us on what your best guess is on how much residential housing contributes to overall revenue as a percentage.

Yes, we've kind of quoted that in rough terms that about one-third of our construction comes from new housing and about -- or comes from residential and about one-third of that comes from housing. We have -- on a little more precise basis, maybe 5% or so comes directly from single housing construction and residential construction combined. But there's a lot of services around those construction that we have to start making some estimates of how much is exactly related to the housing market. So, whether that be plumbing, heating, air conditioning-type stuff, equipment rental, leasing, those types of things, even some of the transportation and lumber and building material dealers, those types of things that impact -- that are impacted by the housing markets.

So I do know this that our trends that I've just discussed here today are driven by the housing market going down. I just don't have exact numbers for you because there's a lot of estimation going on of what's going there. I think that all we can do is say our trends where they've been in the last 10 weeks and what we see over the next 10 weeks is very stable, and it includes the impact of the housing market. Keep in mind we serve 400 different industries.

I guess, Steve, what is it that gives you the confidence that this is really mainly being driven by the fundamentals in the residential housing market versus something more broad based?

Craig, I don't have that kind of confidence. All I can do is look branch by branch, customer by customer and see where the large impacts came. I can look at my forward operations in Southeast and say, "I know why this branch went down. I know why this happened. They lost his customer. This person had 40 workers out on construction sites, and they sent them home." It all started there.

So if you are asking do I think there's a bigger issue here in the economy, obviously, the impact of the housing market is going to drive the economy a little bit. And if this is going to be -- if we head into a soft landing or a slower part of the economy, maybe it was housing driven or interest rate driven. All I can say is we have had the success in moving our workers around, continuing to penetrate some of those other 400 industries. The fact that we are diversified in our -- in both -- that we serve 400 industries, 300,000 different customers and our geographic presence, it actually helps us in a time like this.

The fact that Southern Cal was struggling earlier in the year but the other areas of the countries weren't, and now the Southeast is struggling but California is doing well. I mean that really plays well into our hand, that geographic diversification, let alone the industry diversification. But, I can't put my finger exactly on it. I can't lead you that direction.

Could you give us a sense for what percentage of orders are getting filled these days in the core Labor Ready branches and maybe you contrast that to where we were a year ago?

Yes, I don't have granular enough detail that it would make any sense to you. So, I know that in Florida, we were having worker shortages a year ago and we're not right now. But a lot of that is a product of balancing supply and demand. And a year ago, we were growing at 30% in Florida. This year, we are shrinking in Florida. So, the balance of that makes a great worker supply down there. We know that they will bounce back.

Keep in mind that I didn't talk about is the storm situation. And the storm situation in September of '05 was strong in Florida. We said that it impacted our revenue about 1% in Q4. But, September alone was also impacted in Q3. And that was very focused, and there's just no significant storm work. You know, that might be small, but it might have been $3 million in the month of September alone, which would've been almost 1% for the quarter as a whole.

So if you look at the September same-store sales as only being 1.2, know that that was driven by there was just no storm work in September. Heading into October, things are looking pretty good and we're still up against some strong comps on storm work that was produced last year.

So, there is such a mixed bag of what we do here, I think the best thing to realize is -- yes, we are being impacted by the housing market, but it is a small piece of our business. We're well-diversified geographically and in industries and customer mix. So that all plays well into our hand.

Just a last question and I will get back in line here. What kind of a return do you need to get off of an acquisition in order for it to exceed what you would be getting by repurchasing LRW shares?

That changes from time to time with what's going on with those LRW shares. So that's really not our benchmark. What we are really looking for is we have to look at a longer-term basis. We have to make estimates of what the next five years are going to happen, both with LRW shares and with -- how the acquisition is going to perform.

One thing is we've been producing 20% return on equity, and that's a pretty high hurdle rate to continue jumping over but that's what we're looking at. We're trying to stay committed to that 20% return on equity number, and all of our balancing of our capital is focused on that.

Jim Janesky, Ryan Beck & Company.

A couple of questions -- a follow-up into some comments that you made if I may. You said that going into 2007, you used the word "stable." Is that stable off of current trends; is that what you meant to indicate?

Yes, stable in connection with the last 10 weeks. And obviously, we are seasonal, so you have to put a seasonality adjustment on that. But from what we see, we are bouncing -- we are right in there.

I made that comment in July. So, obviously, there might be some people that are a little bit skeptical because it took another step down. But what we saw in June was -- I made the comment that it felt like we stepped off a curve and felt we stepped onto a pretty stable ground because from the middle of June to the middle of July, things didn't worsen. That's a pretty short window to call stabilization -- I know that -- but we did. But the next two weeks after that, we saw it take another step down.

We hadn't made it all the way through some of those adjustment periods. However, August, September and through the first couple of weeks of October, I don't like where it stabilized but it stabilized in that it's not falling. We are not in a freefall mode here. We have some things that we need to improve on. We have some pockets of the country that need to improve, but we have some pockets of the country that are outperforming expectation.

That's help. And then when you made the comment, "Q1 like Q4," we understand that there is a pretty significant seasonal component to Q1, Steve. But when you say, "Like Q4," do you mean kind of the stability comment of same-store sales growth?

Yes, that's what I'm referring to. And it's hard to start talking too much about that right now. But hey, that's part of our jobs. We're going to do a good outlook for 2007. We will make some estimates or assumptions if you will.

But assuming we grow at this and we will take comps into account that when we're together in November, we are going to try to get some outlook on what we see for 2007, mainly around our cost structure -- how we want to operate, where we're going to operate, what businesses we're going to be in, how aggressive we're going to be on acquisitions or share repurchases -- not that that is going to change. But that is what we will visit about.

We will have some indications of assuming same-store sales growth at x and that we operate our business with these strategies that our cost structure will look a certain way. We can make those assumptions, and we can definitely budget for and plan for a certain cost structure. So, we will do a 2007 outlook next month. But, right now, when I refer to the stabilization, I'm referring to a stabilization of same-store sales and don't see that changing a lot through Q1. But it should get better in Q2 and 3, given the fact that we had a falloff and that's where we got hit -- is in Q2 and 3 in '06.

Are a number of the rest of your customer base where you see this strength? Are they acting as if we're going into a soft landing? Would that be an accurate statement since you do have pockets of strength?

I really can't answer that. I'm not in front of our customers every day. I can look at trends. I can talk to our sales folks. But the fact that our customers -- these are fairly small customers -- 90% of them. And we are serving $1000 per week to these customers. These are small invoices. They're highly transactional environment, and it's hard to make interpretations off of that.

Now I can talk -- our big customers -- some are growing like mad. They've got great outlooks and others are closing plants and trying to consolidate their costs. So I think we have a mixed bag out there right now.

Then, final question, your average price point for last quarter was about $16 a share for stock buybacks. Is that -- is $16 or below a good range that you would get aggressive? Or is that going to still depend upon acquisition opportunity?

Yes, we don't really pick price points like that. We're looking out five years what are stock, what we believe with the plans we have in place, what the valuation of this organization will be worth. We're very bullish on that five-year plan, and we are balancing it with current acquisition opportunities. We don't really try to predict that stock price on a day in and day out basis. This is about a bigger plan, a bigger strategy.

Mark Marcon, Robert W. Baird.

I have got several questions. I guess the first one is just on the gross margin point. Congratulations on reducing the incidents work. I know you've done a lot there.

Thanks, Mark. That's important to us. We appreciate you recognizing that.

Clearly, you've done a great job there. I'm wondering with regards to looking at this last quarter, to what extent was the gross margin improvement driven by the results from this quarter? And how much -- in the last few quarters, you've been fairly straightforward about benefiting about 60 to 70 basis points due to accrual reversals from prior periods. What was it this quarter?

Of the gross margin improvement this quarter, virtually all of that was workers' compensation related. And about half of that improvement was for our cost structure for the current year coming down, and the other half of that was for prior period reserve reversal that exceeded the reversal that we got last year.

So about 50 bps?

Yes, right around that point.

Great. Then, with regards to -- with regards to just the revenue, can you break it down just in terms of what you normally give us in terms of how much revenue you ended up getting or the percentage increase that you got from new branches, acquisitions, closed branches, that whole metric?

The same-store revenue for the quarter was 1.7%. Sales from new branches net of closures was 1.7% and then 0.5% from currency fluctuation.

And we've annualized all the acquisitions, right?

Yes. There's no acquisition growth for the current quarter because we are in four quarters' worth of ownership.

Derrek, can you break down that net new just in terms of closed versus new? Is that possible?

Yes, the new branch growth was 2.2%. The impact from closed branches was negative 0.5%.

Great. And then, can you talk a little bit about what you're seeing in terms of core Labor Ready branches in terms of new -- kind of same-store growth there? And compare and contrast that to CLP and Spartan since everything is in the existing store branch at this point?

We are not going to break out the numbers because this is just one segment for us. We are in the temporary health sector. We bill by the hour; we pay by the hour. All of our sectors are slight skill differences.

But just in general and as I mentioned, CLP and Spartan are producing much stronger results than our on-demand division right now, partly due to the momentum. They are not in every geography, and we are focused in the geographies that are working well.

But we believe that that can continue. We like those trends. They are both producing great same-store sales growth and great ramp-up in their new openings. So, a lot of our drawdown in same-store sales is coming out of our on-demand division in the Southeast.

Is it just the Southeast, Steve? Or is it also the Midwest where you mentioned that there is a few instances with large clients that may be pulling back?

Yes, the major trend change is the Southeast. The Midwest has been bouncing around for 18 months, shows a little growth, shows a little decline, shows a little growth, a little decline. But, the major trend changes that Southeast was producing such great growth for us. And for them to go negative, that's a big trend change. So, that is really what's driving it.

Everything else is balancing out. And without that big pocket down there, I think it would all be balancing very well. And we would probably be in a 6% to 8% or 6% to 10% same-store sales still.

So, like the West for example is still growing 6% to 8% or something like that?

Yes, we have pockets that are growing in excess of that.

Great. In terms of you mentioned that you've got some larger clients. Is that about 10% of your revs would be with larger clients?

The way that I was referring to it earlier on the call that that's -- it's probably more than -- if you're going to call a 30 person order large, that's not how we measure large accounts.

How would you -- in terms of the area where you've got that dynamic where it sometimes can just --

Yes, I don't have that percentage for you. But what we do measure in this 10% number that you are talking about a bit is what we call multi-state or multi-branch accounts where we have a large account that they're taking workers from multiple branches on any given day. That's about 10% of our revenue. But any one branch could have a large account. And we don't have that percentage to share with you.

Got it. Can you just talk about bill rate and wage rate increases for the quarter?

Bill rates increased 5% for the quarter compared to pay rate inflation of 4.9%.

Super. And then lastly, in terms of the SG&A, what was the impact from stock options both for this quarter and as you are looking out towards the next quarter?

Yes, I'm not going to -- I'm trying to keep our discussion on SG&A pretty you know in a bucketized format and not too granular. But the stock comp --

Plus, you didn't have it a year ago, so I'm just trying to -- I mean it's to your benefit.

Yes, the stock comp last year was running -- I think it was about 500,000 for Q3 and I'm rounding here and then about 1.2 million for this quarter -- 1.2, 1.3. You can look on the cash flow statement and get that stock comp number.

Yes, and then it will probably be somewhere in there in the fourth quarter as well.

Yes, it's been running outside of Q1, which is a little bit higher for us. It's been running around in the neighborhood of $0.015 of cost a quarter incremental.

Mike Carney, Aperion.

Steve, you mentioned residential construction. CLP continues to do well, and so it sounds like it's more of a geographic issue with the deceleration in growth. Is residential construction overall -- I mean it seems that even if that was down 50% that most of the other industries would be down. There would be a little bit of a slowing deceleration in growth in the other industries too, correct?

A couple of things there. That 50% number is way off. It's not down that far, our business in residential. We haven't shared exactly how far it's down, but it's not down that far.

Two, the CLP Resources, that division is very focused on commercial construction. These are skilled individuals that are out on commercial projects and commercial construction is growing nicely. That has really held them up. In their areas where they've had residential projects going, they've been able to get those workers replaced.

We've had a larger unfilled order at CLP than we've ever had in our on-demand division. CLP Resources has always run 10% or so unfilled orders. And so there's a little bit of a cushion there to say when people are coming off jobs, we are still looking for workers for other customers and we can get them reassigned rapidly.

In our on-demand division, the unfilled order rate is not near that high. I mean it probably doesn't run 1% or 2% nationally at any given time. Right now, it's not running near that because a lot of the worker shortages again came out of the Southeast a year ago. So, that drives it's a little bit, Mike, the fact that we are commercial and the fact that they had their unfilled order rate -- they have that cushion that they can get those people redeployed.

But if you look at manufacturing and logistics and obviously retail other areas, there must be some deceleration in those customer -- those verticals too.

Yes, there's some deceleration. It's still growth. But there's slight deceleration in manufacturing. But, it's really the services I think that are connected to probably the construction and the housing market, you know equipment rental, all of the subcontractors that supply housing. Those things that are immeasurable to say how are they connected to the housing market definitely, definitely are impacted.

But, the category that's about 20% of our business is called services and other and it's down also. And we know that a lot of that is related to storm clean-up, servicing, whether that be various things. But yes, this housing market is going to trickle over into other industries. There's no doubt.

Let's say wholesale retail logistics; is that still positive growth but decelerating?

I don't really have that level of granularity for you. It's such a small piece of our work that it would be meaningless even if I had it to share with you.

Wholesale, retail and logistics, shouldn't that be 25% or something, like the rest of your business?

I am sorry; I misheard -- I thought you said something else. That's still growing -- the wholesale and the retail. The retail has been a strong performer for us. That's 10% or so of our business, and wholesale is about 10%. They are both still in the growth mode. Retail is strong; wholesale is stable, maybe a little bit off trend but not shrinking.

Then, Steve, if you are just going to predict stable growth in '07, if that were the prediction, then why would you open -- continue to open a lot of branches instead of just focus on your productivity and your same-store sales growth there?

That stability comment really was about Q1. We won't open that -- number one, we haven't made the decision. On a long-term basis, we like opening a consistent number. We believe that we've got geographies that we can push our Spartan unit into and our CLP business unit into.

Your comment maybe in the on-demand division is right on point. We will have more to say about that over the next few months. So we haven't made any commitments out there. I was more speaking to a longer-term trend. But it definitely is a way that we do our business.

You are right on point that if we felt that the industries that the on-demand division is serving, we wouldn't go out there. However, again, some geographies are doing quite well. If we are going to try to open 15 or 20 on-demand units, there's probably 15 or 20 that are in hot markets. And we probably wouldn't throw 20 in the Southeast right now for sure. But there's a lot of territories out there. So we will have more to say on that over the next couple months.

Last question -- in terms of the investment expenses of ramping up sales force and maybe adding management, where are you at that point?

A lot of that is on a year-over-year basis is somewhat stable now. We started that in Q3 a year ago. That's where we really through some extra safety folks at this issue. We had so much success in safety, on a year ago, we decided that we needed to get some of these resources out in other territories. We started with our large territories first -- California, Texas, Florida and then other large states in Washington, Ohio and some of the Midwest. But now, we've got it pushed out and we have broad-based coverage on these initiatives that we pushed out. And that's what we did a year ago in safety.

So on a year-over-year basis, it's getting smaller. A year ago, we were quoting it. This year, it's not even 10 or 20 basis points of the sales force and safety force combined that it is causing the SG&A number to go up. So, we like the idea. I think we're stable as far as advancing the safety teams.

The sales force, I think that is going to be the piece that grows this organization the next five years. I think we are going to become the leader in a sales force customer relationship situation, and we are developing the teams that we currently have. And I think you'll see expansion of our sales force over the next five years, obviously not going to continue to invest in a time where the economy looks difficult. But as given momentum in the economy, we are going to continue to make investments in our sales force.

That's going to be one of our key strategies in this organization. I believe it is the differentiator between us that we can afford and what we can do. And we just put on board a couple of folks that came out of our CLP organization that put some great processes in that business unit. And now, they are working with us in our on-demand unit both from a training perspective and a sales process perspective. Those two executives together are working with our operations leaders, and we're gaining great momentum on how to attack this sales force development issue. And I think you'll hear more about us over the years on that.

We will moderate that investment. We just can't afford to run out there and do everything we want to do all at once. But it's a great idea and a great concept that's going to drive us.

TC Robillard, Banc of America Securities.

Just a couple of quick questions. First, can you give us some color around the non-residential market? I mean obviously, the CLP brand is doing well. But I was hoping if you had some more granularity there because that's obviously a bigger piece of your construction work or industry exposure.

Right. As I just mentioned, the wholesale trade and retail together is about 20% of our business. The retail side is servicing, stocking shelves and loading trucks, keeping product flowing, really it looks much the same in the wholesale trade. These are people that are loading and unloading trucks, stocking and unstocking shelves, doing resets and such. That business is fairly stable. It doesn't look -- if you look back over the last two years on a quarter in and quarter out basis, both of those industries are doing quite well. They are very stable in how we performed. Construction and other is probably the biggest item that's shrinking as I mentioned.

But if you could kind of dissect the construction side between the commercial side, can you give us some more granularity on how you guys are seeing business in the commercial construction arena?

Yes. The breakdown there is -- it's about one-third residential and about two-thirds commercial. The third residential has been hit the hardest. The commercial is still performing well. So, most of the falloff has been in the residential area.

And on the commercial side though, can you give us some impact as third quarter versus the second quarter? I mean, have those growth rates slowed? Are you still seeing the same amount of growth? And this is really all being dragged -- construction as a whole is being dragged down solely by residential?

Yes, right now, we see commercial construction stable, growing, not accelerating in its growth trend but not pulling back. So the falloff in construction is definitely residential construction focused.

Another question -- when we look at the impact and I know you have -- thank you for quantifying the impact for kind of the hurricanes from last year. Can you give us a sense as to when that rolls off when the comps get a little more stable? Do you have a lot of that hurricane clean-up work through first and second quarter of '06, meaning you're going to have still some difficult comps going into first and second quarter '07?

No. Most of that impact came in September and October of a year ago. So we've got half of it behind us, and there might be $3 million, $3.5 million of direct related work in the month of October also. Now I'm not saying there's not a trickle-down effect. The roofs needed repair and longer-term construction was held up. I can't quantify that. All I can say is the immediate spike in business related to clean-up from the storm.

No, that's perfect. That's very helpful. Then, last question -- Derrek, can you give us a sense -- is there any incremental costs that go in with kind of redirecting your offices, so what you're doing in the Southeast vis-a-vis what you did in Southern California? Aside from opportunity costs obviously as revenues need to adjust, but are there any actual upfront costs that go into kind of retraining?

There's not many direct costs related to retraining those individuals. What you have is -- while we serve for the Company as a whole a wide number of different industries, in any given market, the branch or branches may have a stronger focus in a particular discipline. So, when it's time to switch out, really what the training that's going on there is our district managers working with those branches one-on-one, pairing them up with other individuals across the country that have expertise in those disciplines. So it's mostly a sharing of best practices and a focus training effort that just kind of happens on the job.

Jeff Silber, BMO Capital Markets.

Most of my questions have been asked. Just a couple of small ones -- I'm sorry; I missed the guidance that you were giving for same-store sales for the fourth quarter.

We didn't break our guidance down between same-store sales and not. I made the comment that while same-store sales in the month of September was 1.2%, and that's really the stabilization point over the last 10 weeks. Because the first part of July was the strongest, and we've been bouncing between 1% and 2%. So, you can say embedded into our guidance is a stabilized trend of same-store sales over the next 10 weeks.

That's fair. How about in terms of CapEx? What will you think you will be spending in the fourth quarter?

Probably a couple million. We are right around $10 right now and should finish the year around $12 or so.

Great and I know you haven't given official guidance for '07, but should we see something along that same area?

We've got to dig in there a little bit more. I'm not expecting anything more than that. But we are still in the middle of our budgeting process, and we will firm that up as we move into giving guidance for next year.

In terms of the guidance you are giving for gross margins in the current quarter, that 32% or so, does that include another type of adjustment reversal?

The gross margin guidance that we are giving for the fourth quarter is our best estimate of all of the factors that will influence gross margins. So, that's really where we think it's going to come out at. You've seen throughout this year margins come in around that percentage, exceeding our guidance. So, we're really trying to encompass all factors into our guidance and give you our truest best estimate that we know of today.

In terms of these favorable actuarial adjustments, you've had them pretty significantly over the past year, 1.5 years. I know you've improved gross margins even beyond that. But how much longer should we think that we will be seeing these kind of actuarial adjustments going forward?

Those actuarial adjustments are really tied to -- the key driver, while there are many factors influencing workers' compensation -- is our safety record. And while we've had a good performance, we're not done yet. There is still a few things that we're looking at and that we are working on.

That's a tough one to predict by quarter, specific number of quarters that will go on. But there is really a few things going on in our workers' compensation. While we've gotten some favorable adjustments that come back to these prior reserves, you've also seen the trend in our current run rate going down as well. So, we will just have to get around to 2007 and see how the accidents go. But we haven't taken our focus off of it.

That's great to hear.

Michel Morin, Merrill Lynch.

I was wondering can you give us a bit more color on what happened in California earlier this year? You mentioned that there was a bit of a falloff and it's recovered nicely and it's one of your stronger -- or you're seeing very good growth there right now. Can you maybe put a few numbers around that if at all possible?

Much likely, we don't talk about the region by region numbers. All I can say is we went negative there for a few months in Southern California. The team has rallied and regrouped and shifted the business mix. They have had some great success, and they are growing in double digits now.

Double digits in terms of same-store sales?

Yes because we haven't opened a lot of new offices in California in a long time.

What are the industries where you're seeing that growth coming from?

There's a lot of logistics and transportation, moving goods. Maybe this is a product of the import situation on the West Coast, but we've moved some workers into there. We've picked up some great accounts in transportation and a little bit of light manufacturing but mostly warehouse and logistics transportation.

And the minimum wage is going up on January 1st. How do you see that in terms of your ability to raise price and protect your margins there?

We are very confident. We have a great track record whenever there is a minimum wage hit in a given state. And our teams know about this. They plan for it. The branches are aware of it. We have letters prepared. There's great training around this. This is one of the strengths at Labor Ready -- is we control the wage rates and the pay rates because we are paying and billing on a daily basis. We're not locked into long-term contracts.

So we feel very confident that we won't miss a beat in our strong matching of these minimum wage going out. Sometimes, we show improvement because it gives us an opportunity to renegotiate or at least tell a customer that our bill rate is no longer $13.50; it's $14. And maybe minimum wage didn't go up that same percentage, but we have a great track record that this has always been a positive for us. And we believe that it will be again.

And California is -- I think the last you had disclosed was about 18% of sales. Is that still about right?

Approximate. Yes, I don't have an exact number in front of me but it hasn't shifted. It may have gone up slightly because they are growing and the Southeast is shrinking, but I don't have an exact number in front of me.

Then Derrek, I think your comment about the SG&A for Q4, your guidance for Q4, it would seem to imply that it would be about flat year on year. I don't know if maybe I'm missing something there. But that obviously would imply that you are taking some costs out somewhere, given that you've got the additional impact of stock-based comp. Is there anything in particular that you've been doing on the cost side?

We are always looking diligently on the cost side, and we are always looking for -- I'm not trying to be too squishy about this. But honestly, we are always looking for taking non value-added costs out of the business and make sure we are running things lean. And as with all businesses, there may be certain costs in the past that added value. And then as the Company matures, they don't. So we are always taking a look at those things.

As far as the SG&A guidance, I think when you take the guidance that I have given you and normalize it for those three items that I talked about this quarter and that will also impact next quarter, you will see that the SG&A rate for -- or percentage for Q4 this year compared to Q4 of last year, you are looking at the kind of same rate of leverage between the two quarters that we experienced Q3 of this year compared to Q3 of last year.

There's also -- if you check your notes closely, there was an abnormal cost in Q4 of last year. So that is not recurring.

Mark Marcon, Robert W. Baird.

Just following up on the expenses. Steve, in the past when we've talked, you've talked about the sales program and how well that's been going. How should we think about that rolling out? And to what extent do you feel like you can invest in that initiative? Because that seemed to pay off pretty well for you in the markets that you ran it in.

One thing about us at Labor Ready, we like to grow in the short-term and long-term. So we are not going to sacrifice a long-term program if we think it's good, even if it causes a little bit of extra expense in the short term. But at the same time, we're not going to over-invest for the long-term because we believe we need to grow every year.

So with that, we have got to balance -- we've got this great long-term idea, and we see that it's going to work. We need a stronger sales team -- force out there city by city, market by market. We've invested in five or six cities right now. We would like to invest in as many as 30. So we might only be 15%, 20% of where we want to be.

So, we've -- but we can't do that all in one year because we respect the fact that we want to grow here at the tail end of '06 and into '07. So we have to moderate that investment, and a lot of it is predicated on collectively how strong the same-store sales are growing. If our same-store sales are growing 6 or 8%, our profits from that are going to be growing 25% to 30% because we still have great leverage in our business. We want to take some of that leverage and reinvest it in the sales force concept. And yes, even as good as an idea as it is and it would bump revenue in '07 to have a stronger -- it wouldn't pay for itself. We'd see an earnings decline for that and that is unacceptable to us.

I see. And so when we think about next year maybe the margins end up staying roughly the same next year as you balance kind of that growth target relative to the investments. Is that a good way to (multiple speakers)?

The operating margin?

Yes.

Yes, that's right. I think that we've gotten our EBITDA margins up above 8%; our net income percentage is above 5. I would rather invest in these programs than see that net income percentage grow to 6% or 7%. I would like to see the top-line growth, so we are improving our cash flow position on it every year. However, over the next two or three years, there's growth -- as we get our leverage off of the growth that we expect, we will invest a little of that in that. We won't see margin expansion possibly. But, the top line will grow and the cash flow will grow.

Mike Carney, Aperion.

A couple more -- Steve, on management resources, where do you stand at this point in terms of -- do you think that you need, maybe I'd say increased or enhanced management? And over the next year or two, you will be looking to add to that?

At what level are you talking?

Well, just across the organization. When you're talking about growing the sales force and you are having to change the strategy placed in Canada it did some stuff and it's a little bit slow. Construction employment has not declined. It has decelerated but not declined as much. And obviously, temporary staffing is a little bit of a leading indicator. But where do you think your current management situation is all the way down into the branches as to where it needs to be and further investment there?

Well, at the branch level, we anticipate no change. There actually is -- we build a sales force in these cities; there's actually a little bit of a pullback at the branch level because historically they've been responsible for their own sales. And when we build the sales force around them, in any given city, then they can pull back a bit on their headcount. Now that's not management; those are support personnel that are supporting that branch manager.

But as far as expanding management in the branch, the headcount number, it is not necessary. What we really are focused on at the branch manager level is the quality of leadership.

Something new for us that we just started this fall is leadership training for our branch managers, teaching them how to manage multiple tasks, multiple processes and how to be balanced in their approach. Our initiative over the last few years was to reduce turnover. That is very -- that is now a stabilized point; we've cut it in half over the last few years. It has hit a point where we would like it to be a little less, but we understand that people have choices and that's what happens in those level of positions.

Our turnover in our management level position is much less than what exists in the services business or the fast food industry or restaurant industry. So with a stable base of managers, we are focused on leadership development for them. One level up is what we call a district manager or an area manager that manages four to eight branches, and I call them area managers because they are a little different in each branch. But nonetheless, it's that level of manager that is managing multiple units, anywhere between four to eight.

That's very stable. We don't need to expand that group. We have enough ability to grow since there is a span of control of about four to eight. We believe that we don't need to increase the number of people in that layer. We need to increase the quality, so it comes back to a leadership development again. And we have programs in place focused right at that group that are brand new for '07, hasn't been rolled out yet. But we expect big results from that in helping to reduce turnover in the branches because our organization is ripe for solid leadership principles in those branch managers and in those district manager levels.

The level above that is folks that run six or eight districts. And they are fairly stable. The turnover in that group has not been there. We've been working on developing that group to be executive-level leaders. We've been working with them on how to plan your business, how to motivate your teams, how to really be a full-level leader instead of just a localized business unit leader.

So as you hear me describe, leadership development is one of our top priorities in this Company. As far as increasing the quantity which you were kind of headed to --

No, I was talking about improvement.

Quality, very, very focused; quantity, we don't need to increase the quantity. All of our initiatives are about the quality of leadership, and it is our number one focus. And going into 2007, leadership development from the branch manager, district manager, area level, all the way to my seat is our number one focus. We know that as we put strategies out there, they are going to grow this organization to $3 billion. We need to bring the leadership team along with them. And so, investing in leadership development to make everybody's focus and vision of who they are as individuals match the focus and vision of the organization as a whole is our number one priority. So, quantity no, yes quality; we are very focused on it.

Second, obviously, your pricing has stayed in hands increased. And, you know, in terms of the strategy, now you are getting bill rates and some of it's due to maybe some large customer dropping off. But it looks like overall, your bill rates are remaining pretty strong relative to historic -- historically. So, where do you see the kind of the equilibrium point for pricing versus trying to maintain volumes with your small competitors.

One of the things we are proud of is we are the service later. We bring something to the marketplace that doesn't exist. We come as the compliant leader in the organization in the industry. We have a partnership with the EOC, with the DOL. We are publicly traded. We are SOX tested. We have all of that going for us as far as we're the proven ethical leader in this industry. That matters to a lot of companies. We bring that.

That costs money though to come with that level of compliance and confidence, even on an issue like immigration. Never have we've been proven to not be in compliance with all immigration laws. And all of our workers tested. That means something to us.

And in the industry, we are the leader. We are the leader on service but really the ethical leader. And for that, that quality that comes as that service leader in on-demand world, we get a premium price. Now at the same time, we know that there is a point -- a tipping point and we are there. We don't intend to expand our margins. That has not been a focus of ours for years, probably going clear back into 2003 since we've pushed our operations, maybe it was the fall of '04 the last time we really focused and pushed to say, let's get pricing margin improvement.

But we like it obviously but we know better. There's a point that we've hit. So we don't push on that. However, we do push and we keep in front of our teams that we are the quality leader and that we are the service leader in this industry. And we keep that confidence out there and we continue to sell into it. It's not going away. We're not going to let our margins erode, but we don't see them improving either at this point because of those things I've talked about.

Jeff Silber, BMO Capital Markets.

Just one quick follow-up -- what was worker compensation expense as a percentage of revenues this quarter?

It was 5.7%

5.7, thanks.

Are there any more calls, Operator?

At this time, I'm showing no questions. (OPERATOR INSTRUCTIONS). All right, we have no questions on the phone lines. I will turn the call back over to the presenters for closing remarks.

Thank you. We do appreciate your questions. We appreciate your interest in Labor Ready. We've got a lot going for ourselves here. We believe that the things that we've talked about here, the momentum will shift. We love the business model that we are in. And the uniqueness that we bring, not only to the marketplace for customers but the uniqueness that we bring to investors, we find quite intriguing. And we're confident in that we can remain in that category.

Appreciate you and we will talk to those of you that plan to attend the New York meeting on November 15. At this point, we will close the call. Thank you.

Ladies and gentlemen, thank you for joining us on the call today. You may now disconnect your phone lines.