TrueBlue Inc (TBI) 2006 Q4 法說會逐字稿

Welcome to Labor Ready's conference call. Today's call is being recorded. Joining us is Labor Ready's President and CEO, Steve Cooper, and CFO Derrek Gafford. They will discuss Labor Ready's 2006 fourth quarter results, which were announced today. If you have not received a copy of this announcement, please contact Lisa Wittrell at 1-800-610-892 (sic) extension 8206, and a copy will be faxed to you. At this time I would like to turn the call over to Ms. Stacey Burke for the reading of the safe harbor. Please go ahead Ms. Burke.

Thank you. Here with me today is Labor Ready's CEO and President, Steve Cooper, and CFO Derrek Gafford. They will be discussing Labor Ready's 2006 fourth quarter results, which were announced after market close 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 that in this afternoon's conference call management will reiterate forward-looking statements contained in today'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 materially differ. Additional information concerning factors which would 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 10Q and 10K. I'll now hand this call over to Steve Cooper.

Thank you Stacey. Thank you everyone for joining us this afternoon. This afternoon we reported net income for the fourth quarter increased 40%, while net income per share increased 50%. As mentioned in our press release today, we had certain tax rated items that contributed $0.08 a share to net income in the quarter. Derrek will discuss those items with you further later in the call.

Excluding those tax rated items, net income grew 13%. Record setting operating margins of 7.7% produced in 2005 were repeated again in 2006. We are pleased with the income growth and operating margins, given the current pressures we see in the labor markets. Our income growth this quarter is directly attributed to the daily execution by our management team. The need to manage both pricing and the costs in our business is important during time when demand is soft, and our team is executing very well give the circumstances.

Same branch revenue growth remains our most important metric in measuring how our core business is performing. In the fourth quarter same branch revenue declined 2% compared to the year as a whole, for which we saw a growth of 4%. As you can see, same branch revenue growth for the year was much stronger than we experienced in the fourth quarter.

On our second quarter earnings call, in July, we reported that we had seen a slowdown in revenue growth during the latter part of the second quarter. This decline was directly related to residential construction activity, and the cancellation or delay of residential construction projects, mainly in the southeast. Our growth rates remained fairly stable throughout the third and fourth quarters until about Thanksgiving, which at that time we saw revenue growth start to fall off further, which resulted in November's and December's same branch revenue decline of about 3% to 4%.

The additional fall off in the revenue trends in the later part of the year was driven mostly by other geographic areas experiencing the same negative trends in residential housing construction that we saw in the southeast earlier in the year. We have also seen a general slowing trend in manufacturing across most geographies.

Although we expect a decline in revenue during the first half of 2007, we are as confident as ever that the fundamental demand for our services is sound. And we are just working through cyclical adjustments in the labor markets, particularly construction and manufacturing.

We have estimated revenue will decline 4% to 6% in the first quarter. In relation to our long term business strategies, we understand we operate best in cyclical industries. By using our services, our customers can scale back their labor costs quickly and efficiently as their businesses slow. That's a big part of the value we provide.

It's our job, as the management team, to execute through the challenges that come with the downward part of any cycle. When demand picks up again for our customers we will be there to help them ramp back up, and of course continue to drive the operating leverage in our own business model.

We have taken measures to cut and control costs in several of our support services and administrative functions, which will allow us to keep those costs from growing while we are in a soft revenue growth period.

During the quarter we closed 16 offices and intend to close approximately eight more in the first quarter. About half of these 24 are being closed as a result of them not reaching profitability standards, and with demand softening we don't believe it is prudent to keep them open. The other closings are truly consolidations with a nearby branch, and we believe we will retain most of the revenue while controlling the operating costs of serving those customers.

Closings and consolidations are something we watch constantly, and we use as a method to control operating costs in softer periods of demand for our services. As the reacceleration begins, we will be prepared to continue to drive the leverage in our business model and accelerate our expansion plans.

During the quarter revenue from new branches contributed 2.7% growth. During 2006 we opened 50 new locations, these openings were balanced between Labor Ready, CLP Resources and Spartan staffing. We are pleased with the results of these openings and believe we can continue to open new locations successfully each year.

With some caution in the air for 2007 we've decided to only open approximately 20 new offices in 2007 versus the 40 we had previously announced. Half of those new offices will be in our CLP Resources division, which supplies skilled labor, primarily to the construction markets, commercial construction that being.

The current results in that division have remained strong in comparison to our on demand brand of Labor Ready, CLP Resources does not have as broad of geographic presence, therefore we believe the investment in new branches in that division will continue to provide great returns on investment.

The other 10 new branches will be split between Labor Ready and Spartan. These offices are going into markets where we have employees ready and customers that need served. Even with demand soft, we believe these offices will meet our expectations of performance for new locations.

Our 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 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 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 brands, and perhaps most importantly, we have established new regional platforms that we can expand and grow into a national presence.

We will continue to explore further opportunities to acquire companies that are leaders in a blue collar staffing niche that we can grow through geographic expansion. We will approach this in a disciplined manner to insure returns on invested capital and net income growth continue well into the future.

We remain confident with our business model and we are optimistic about the long term demand for both skilled and unskilled labor, especially in the small to medium size business markets, which is where our services are most widely used.

Our gross profit margins held strong in the fourth quarter, we attribute these strong margins to an experienced management team throughout our organization delivering high customer service. Another component contributing to strong gross margins is the success we have had with reducing our worker's compensation costs. While we have implemented a variety of programs to reduce the cost of workers compensation, the most important driver of our results is our culture. Our safety culture continues to get stronger, it's something our people believe in. It's something they live and breathe every day.

It's this kind of passion that will help us continue to produce strong results in the future. We are proud of our consistent 20% return on equity and 12% return on assets over the past three years. We have announced a new authorization to repurchase and retire an additional $75 million of our stock during 2007 that will help us continue with those great returns.

At this time I want to turn the call over to CFO Derrek Gafford for further details on our operating and financial trends. Then we'll open up the call for any questions you may have.

Thanks Steve, good afternoon everyone. Steve just spent some time discussing our operational trends with you. I'm going to spend a few minutes talking about some of our more significant financial trends.

So let's start off in covering gross margin. Gross margin remained strong this quarter at 32.6%, similar to our results in Q4 of 2005. This was an improvement of about 60 basis points in comparison with our expectation for the quarter. Our operating and risk management teams just continued to do an outstanding job in controlling the cost of worker's comp by reducing work related accidents.

Our gross margin estimate for 2007 is 31.5% to 32%, which is below our 2006 gross margin of 32.1%. With over 20 states increasing the minimum wage and softer demand, we do anticipate some delay in passing these costs through to our customers.

Sales, general and administrative expense as percentage of revenue was 24.6% for the quarter, which is about 20 basis points above our expectation, but it's in line with what we would expect based on our revenue for the quarter. for the year, SG&A as a percentage of revenue was 23.6%, an increase of about 40 basis points over last year.

As we've discussed in the past, there are four items that have added to SG&A this year. First is the incremental impact of stock based compensation. Secondly, since CLP was purchased at the end of May 2005, their expense for the first five months is not included in our prior year comparison. Third is an increase in our mixture of new branches in the CLP and Spartan Staffing brands, which both have a higher initial cost structure than Labor Ready branches. And fourth is the investment in sales and safety teams that we have continued to make during 2006. Since these four items have been present during most of 2006, their impact on year-over-year comparability will be less of an issue as we move into 2007. Based on our current revenue estimates, we expect SG&A to be about 24.1% to 24.5% for 2007.

I'm going to spend a little time now covering our tax rate for this year. We finished the year with a tax rate of 34.2%, which was below our expectation of 38%. There were some nonrecurring and some recurring tax events that took place during the fourth quarter. the nonrecurring items related to our ability to take a tax deduction on state net operating losses accumulated in prior periods, as well as a decrease in our blended state tax rate for the 2005 tax year. These items produced a combined impact of about $0.04 per diluted share, and decreased our annual tax rate by about two percentage points.

Now let's cover the recurring items. These items included the retroactive extension of the work opportunity tax credit, and a decrease in our state tax rate for the 2006 year. These items produced a combined impact of about $0.04 per diluted share, and also decreased our annual tax rate by about two percentage points. Looking forward to 2007, we estimate an effective tax rate of about 37%.

This afternoon we released our diluted net income per share guidance for 2007, of $1.25 to $1.30, based on an estimated weighted share count for the year of about 51.3 million. Diluted net income per share for the first quarter of 2007 is estimated to be about $0.14 to $0.16 per diluted share. Our estimates do not include the impact of any future share repurchases.

Our balance sheet continues to get stronger, we finished the year with cash and marketable securities of just under $200 million. Strong day's sales outstanding and outstanding progress reducing our worker's comp exposure for the fourth year in a row.

So let's cover some of our expected uses of cash in 2007. We expect capital expenditures in 2007 of about $12 million to $15 million, which is comparable to 2006. Over the last year we've also been actively engaged in returning capital back to our shareholders. We repurchased about $89 million of the company's stock in 2006 and we have authorization to purchase up to an additional $88 million, which we intend to complete in 2007.

We also continue to be interested in strategic acquisitions that complement our Spartan Staffing and CLP brands.

We understand the dynamics of our industry and are confident that the softening demand we have experienced is a cyclical issue. Earlier in the call Steve discussed some of the recent cost control actions we've taken. This is an area we continue to watch closely in conjunction with the demand for our services as we move into 2007.

At this point we'll open the call for questions.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Craig Peckham, with Jefferies and Company. Please proceed.

Hi Steve, hi Derrek.

Good afternoon, Craig.

A question about some of the costs and issues you've been taking so far. Could you give us a sense for when those went fully in motion? Was it mid-quarter, beginning of the quarter?

And secondly, could you sort of remind us what other leverage do you have at your disposal to work through the slower top line growth on the cost side that you're not tapping into yet?

The costs that we're referring to, the bulk of them come with the closings of the offices; the consolidations, the 16 that we did in Q4 that - those were probably a mid-quarter balance. You know, mid-November, towards the end of November, the bulk of those started closing and then the eight that we've announced in the first quarter.

As far as an administrative and support services, there's another $4 million or $5 million that we've cut back. There is some reinvestment in some things that are important to us, like leadership development and sales training. So, it's not a full $4 million to $5 million savings at this point in time. It's really half that.

But, you know, as we compare this back to the earlier recession that happened in 2000, 2001, and we're not saying that this is in a recession right now, but, it's similar to the front end of what we're going into.

The company's structure looks quite a bit different than it did then and there's not as much low hanging fruit to us, as we were in a national advertising program at that point in time. And, we had just gone through a major expansion program of opening 600 offices. That's not really in front of us at this point in time, Craig, so we're not - we don't want to send any message out there that we have $50 million of cost that - and levers that we can pull.

But, the main levers that we do have are the consolidations and the closings. With the ones that we've completed and the ones we've announced, that's really all we see in front of us for 2007. We don't see this getting worse. Right now, the trends have been stable. It's not like we can't predict where the trends are down and where they're headed.

So, I think the 24 that we've talked about here today is probably as far as we're going in the branch office closings, unless things get worse.

But the number one lever that we have is the variable compensation within the walls of a branch. And, all the transactional costs that come with that. So, as revenue pulls back, bonuses pull back automatically. In certain offices, where there's been a drastic fall off in revenue, they might have had five employees in the office; now they have four. So, the variable compensation is about half of the costs within the four walls of a branch. And, we have a pretty good staffing model that keeps a good eye on that and control for us.

So, those are the major things that we have in front of us. It's just a general, everyday grind for the management team to stay on top of those reports and understand where the trends are headed. We have a great modeling system that we used the last four to eight weeks' trends, four in particular when it comes to staffing to insure that the staffing in each office is balanced with the current revenue of that month. So, we believe we have our eye on the ball there.

We do know this, though, is, if we're in a period of 4% to 6% revenue declines that there will be some anti-leverage, if you will, that the cost, as a percentage of revenue, will drive higher. And, as proven by the guidance that we've given here today, you know, with a 5% decline in revenue, you see the profits falling off a little steeper than that.

And, it's - the impact in Q1 is a lot larger than in the other quarters. So, you're seeing that fall off greater there. But, it is about a two to one on the way down as it is on the way up. But, as you can see, our guidance, as a whole for the year, that we see the back half of 2007, the comps being easier. And, as we work through these next two quarters, if we can keep the sequential revenue where we have it today, we'll see growth in the last half of 2007.

And Steve, if you could round out the math for us on what the underlying forecast under the new guidance this year, on the same branch revenue growth. I believe that the previous guidance said that it is sort of a 2% to 3% same branch growth outlook. How are you thinking about '07 now, under the new guidance?

The guidance is primarily flat for the year as a whole. And, with that, we'd probably see growth from new stores of about 1%, since we're pulling back and only opening 20 this year and, same branch revenue being down about 1% on the year as a whole.

In Q1, it's a little more drastic than that. We're predicting 4% to 6% overall and same store sales probably down just slightly more than that because the growth from those branches opened the last 12 months is producing about 2% growth right now. So, we do see a swing in this.

You know, one of the things I do want to point out is the branches in the Gulf states and where the hurricanes hit are not only fighting the residential housing market, but they're fighting the year-over-year comparisons when we had all the hurricane clean up of a year ago. And that all subsides in Q1 and Q2 and we see ourselves back in a growth position in Q3 and Q4.

Okay, thanks for the color.

And our next question comes from the line of Jim Janesky with Ryan Beck. Please proceed.

Yes, Hi, Steve and Derrek. A couple of questions; can you give us an idea of how the first quarter has, the first couple of weeks of the first quarter have, trended with respect to same branch revenues?

Obviously, from the way I just answered the last question, I showed our hand a little bit there that, with revenue guidance being down 4% to 6%. And, same store sales producing 1% or 2% above that. Excuse me, sales from new stores producing 1% or 2% above that that we're seeing same branch revenue in January down in the 6% to 8% range. But, we have seen it come back a bit in the last two weeks.

It was - through the holidays were interesting for us. We had a larger fall off and, as I mentioned, when we got into Thanksgiving, it took a step down. And, then even during Christmas and New Year's and the week after New Year's, it took a further step down. But, we've seen a slight recovery since then. And, we're probably closer to the 3% to 4% same store sales, going forward, down, being down.

Okay, and, Steve, do you feel that the good weather that we had in the fourth quarter and, you know, in the northeast and such, do you think that helped out at all? And that, you know, there are parts that are - there are parts of your business that are, you know, could be declining more than that? Or, what do you think the trends are?

You know, it's hard for us to understand how the weather impacts us, because it's interesting enough, you called out the northeast. A large part of our December forecast of revenue in the northeast is snow shoveling. And, so that doesn't happen. And, maybe construction continues but the northeast isn't a large construction area for us anyway. So, the people in the northeast are saying let it snow, let it snow. They'd rather see that in December and January. So, it's interesting where some are saying the stronger weather helped construction projects overall. It probably wasn't a positive for us.

Okay. And you mentioned the strength that you saw in CLP. Can you give us some numbers in their same store branch growth? And, can you also give us an indication of where there are possibly other areas of strength in the company?

We're not going to break our brand, same branch, revenue out. During that first year that we owned them, as being part of the acquisition analysis, we were breaking that stuff out. But this is just a consolidated business at this point in time. I had made the comment they're running stronger, their commercial focus. They've had some impressive projects that have just been outstanding.

In the fourth quarter they had a record-setting project that - they just had record-setting numbers, all the way through December. It softened a little bit because that huge project ended, but there's more around the corner for CLP. It's an outstanding division, with a great management team. Their business model is sound and we like the focus on commercial construction in that division.

They also have a larger backlog of unfilled orders than we have in the Labor Ready brand. It runs 10% to even 20% in certain branches where they just have open orders all the time. And so, if there's a little bit of a downturn, the first cushion is that unfilled order. So, their results just keep on pumping and we haven't seen - we haven't even seen that unfilled order rate decrease at CLP but that was just kind of a cushion I was going to mention.

But, overall, Jim, we're really pleased with the CLP acquisition and we look to continue to push the geographic expansion in that division as we believe the balance of serving customers, in both skilled trades and general labor, it's positive for our customers to increase that loyalty that we're looking for.

Sure. Were there - were there any other areas of strength, either by industry or geography, Steve, that are meaningful?

Well, we did spend quite a bit of time the last 18 months talking at United Kingdom and some of the struggles that we had there. We've got new management over there. They've probably been there the last 10 months, actually have lived there the last four to five and we're really pleased with the turnaround in the United Kingdom. They're producing some strong results for us.

I know the economic environment looks a little bit better in the United Kingdom than it does in the U.S. right now. But our own team and our leadership structure there looks a lot better also. So, that's one area that's doing quite well for us. Everything else is experiencing about the same types of trends.

Okay, thanks for the color, Steve. I appreciate it.

And our next question comes from the line of Mike Carney, with Aperion. Please proceed.

Hey, good afternoon. I'm just going to run through these pretty quickly. Derrek, you have the bill rate and pay rate for the fourth quarter?

Yes, I do; I'll give that to you. So, the bill rate for the quarter, consolidated for the company, was 4.4%. And pay rate was 4.6%.

And then, the decline in revenues from closed branches, or, you know, other that usually breaks out?

So, I'm going to give a few factors here because some others may have questions on this. So, you've got the same store sales percentage, growth from new branches for the quarter of 2.7%. Impact from closed branches, -.6% and currency fluctuation .4%.

Thanks. And, it doesn't appear that you've had any really accounts receivable issues or credit issues. Is that correct, when you dig into the numbers that you really haven't seen any problems on that front, in terms of customers?

You know, accounts receivable and our credit practices have been performing very well. You know, if you take a look at the numbers of the - DSO is right in alignment with last year, maybe even a half a day better. Bad debt expense has continued to perform really strongly for us. So, we haven't seen anything pop up there. The only question we've been asking ourselves is have we been maybe a little too tight on our credit.

Okay and then, in terms of the branch closings, can you just give us an idea as to - are there - are there any CLPs or Spartans that would be in those closings? Were they all Labor Ready's that never reached profitability?

Yes, those were - I don't have every branch here in front of me, but the overwhelming majority, if not the entirety of them, were Labor Ready branches.

Okay and then on the - on the - you assume 51.3 million shares diluted next year. So, that wouldn't really assume - or, a very minor amount of buyback then?

Yes, you know, when we've given our guidance and when we've given share count projections we just don't factor in stock repurchases, because that's -- it's just something that's hard to predict and we don't lay out a specific commitment by quarter. So that is exclusive of any share buybacks.

Okay. And then Steve you mentioned, when we were talking about what you can do on the cost levers, if the guidance is going to be, for operating expenses, 24% to 24.5% and that's well above what you were even running at this year. I mean I'm confident that you can do it, but isn't there -- don't you think that there's some more areas to make the negative cost leverage less?

Well we're beating that drum every day Mike. I guess to caveat my response earlier; I didn't want anybody to think there's some of the lower hanging fruit that five years ago we went through this process that we were able to pick $20 million of cost savings besides the $30 million that we saved in the branch structure. We closed over 165 offices at that point in time, we were running a national ad campaign at that point in time that was costing us $15 million a year, and we had several other cost structures like that that we're fairly easy to save.

As we ramped up our revenue the last three years we kept this thing pretty tight and that's how we got all of that leverage in '04 and '05. We didn't expand our cost structure, so there's not a lot to run back out there and cut out.

Right, I understand. But if you're going to do, for the full year, flat, maybe slightly lower same branch sales growth now as your projection, then to see operating costs actually continue to increase well above that. But you did mention that there's a little bit in the admin/support and obviously there's a few million dollars from the branch closings and you're obviously only going to open half of what you expected. Where is the other investment that you're making?

Well keep in mind there's just general inflation in there that we're battling also. So we just finished $319 million of SG&A and that cost structure in itself has inflationary factors, getting bigger benefits and your compensation and your rent and utilities and those types of items that are marching forward by a couple of percentage points even if you have flat revenue.

So to combat that there are some $2 million or $3 million of cuts that we make just to combat the inflationary factors, so you have that fighting against. We are opening 20 offices, and I guess if trends worsen we haven't signed all 20 leases, we've probably signed about five or six of those, and maybe by the time we get into the first quarter we'll have half of those signed and ready to go. We could still pull back on the openings.

If things worsen that changes our view of consolidations and closings, then obviously that's a weekly conversation as we watch the trends. But we are betting more, Mike, that this is -- I don't know if I can call it a mid cycle lull, but definitely a lull and adjustment in the labor markets. Obviously GDP was announced yesterday, and the economy in certain parts is percolating pretty well.

We've talked about construction here today, it's under pressure, and the manufacturing and transportation business also. But we're awfully proud of our teams that are readjusting into those other industries, to sell into. And we do have some pretty big comps over the hurricane numbers and construction of a year ago that we're battling through and we're looking for a good latter half of 2007.

And if all the forecasts of what's going to happen to the economy take place, we'll be right back on track moving into 2008.

Okay, agreed. And then when we're talking about those customer verticals, what can you give us some clarity on -- obviously construction, manufacturing you mentioned, transportation's probably not great. But you had mentioned that retail was doing better. Any others that are performing well?

You know retail is doing very well, and I believe that's what's driving GDP also. Our retail numbers are up like we've never seen, and it's hard for us to even comprehend it actually, they're doing so well.

Wholesale's not that bad, but offset by some pretty strong construction numbers; and manufacturing across the board, there's several areas that are down 10% or so, and others that are flat, not a lot of growth anywhere in manufacturing, but it's ranged between zero to right around double digits, 10%.

Construction across the board is down everywhere. The last time we talked we were mostly focused on the southeast and larger residential projects down there going away and that really spread the last three months into other territories, other areas of our company.

Wholesale and services, those any unique trends?

You know it's a little bit spotty. Florida has experienced a downturn in services and other and transportation. Things like when construction projects go down then garbage pickup goes down, they're not hauling all the excess garbage off those sites. The ports that haul all that construction, all the product into the state, in the Jacksonville area and even over into the St. Pete area, those ports, that business is down. And we do a lot of business unloading those ships.

So industries that work with construction well felt the effects the last three months. So Florida's still under siege if you will. We'll work through that. I know the comps get easier in Florida because it stepped off so strong. It was amazing, we've talked about this on the last couple of calls, that one day things are flying along and all of a sudden project after project is getting canceled in Florida. Why it started in that state, I don't know, but it really spread later.

But those comps will get easy fast for the Florida teams and they're looking forward to it. Right now they're battling through it and I think their spirits are high. It's a tough team down there, they're one of our best, and we're proud of them for what they're working through. They've got our support; we know that we'll get this thing back on track.

Okay, and then I know you mentioned already that obviously southeast and probably Texas and central is not going great, but the northwest and the southwest had been performing pretty good for a while. Has that changed outside of -- you know if you take out construction, has that changed?

Well construction's the leading laggard if you will, in the northwest. The northwest was one of the last to be impacted by construction; it was almost like a wave coming across the United States from what we could see. It's hard for me to understand why it worked that way. The northwest team though does have more industries they can sell into and the other industries are doing well.

And say -- was California, excluding construction?

You know the manufacturing in California has been pretty solid, they haven't felt the larger declines that some of the other areas have, and so that's helped them. They took a pretty big fall off in construction earlier in the year and they bounced back from it and were able to diversify over into some other areas. But they've got a little more balanced portfolio down there in California.

We've seen the port business, the shipping business in California hold strong. Maybe with all that off seas shifting of manufacturing over there the logistics business is holding up strong for California.

Okay, thanks. And one more thing, do you happen to know if food service, would that be in retail or services?

Most of that's going to be in services.

Okay, thanks.

Our next question comes from the line of Michel Morin with Merrill Lynch, please proceed.

Thanks, good afternoon guys. I was wondering, on the gross margin front, can you -- was there any benefit from reversals to worker's comp? Or can you just let us know what the worker's comp was down? I'm assuming it was down year-on-year, in basis points terms.

Work comp for the quarter was very similar to where it came in Q4 last year. It finished this quarter at 5.1% and that's pretty comparable with where it was the same quarter a year ago.

Okay, and then maybe Steve, in terms of when you went through the last downturn, what did you see in terms of worker's comp? Is it fair to say that there's a bit of cyclicality to that?

You know it's an interesting question. The challenge with answering it is the insurance markets looked so differently back then, even without regard to how the labor markets performed. The insurance markets have come off of huge returns on investment out of their investment portfolios. I don't believe that they had pure pricing premium to losses balanced properly industry wide, and claims were out of control because of that I believe.

So I think there were a lot of other factors than just the downturn in the labor markets that we experienced. So I don't know if that cycle is going to follow. I believe that the insurance companies are run a little more sound. The savings in worker's comp that we're reporting, and that I hear others reporting, are truly operational in nature. They're claims related and cost of claims related, and not offset by huge investment gains.

So I believe that the portfolio nature, or the way the insurance business is run today is more sound than it was in 2001. Then we all experienced the negative impact of 9/11 in 2001 that really through the insurance markets into havoc. So I don't think we have all that working against us, we're pretty excited about what we see, we're focused on controlling accidents. We're focused on reducing the cost of the average claim.

And the change for us is back then we had a $350,000 per incident deductible, today we have a $2 million deductible. Therefore that really puts this in our own hands. We control our own costs. We don't have claims that go above our deductible. It's there for catastrophic purposes, but we really are in control of our own destiny at this point and time.

And as both Derrek and I have mentioned today, it's really become a strong part of our culture, and the folks in operations that are out there day in and day out, they have great measurements, they care about our workers, and they're a competitive group and they love to just reduce accidents just for the pure metric of it, that alone.

So I don't think we're going to experience that cyclical nature Michel.

Okay and then so is it fair to say then that your gross margin target for '07 doesn't include any change in terms of, either positive or negative, in worker's comp in '07?

Our gross margin estimate really is our best estimate with all factors included on wage rates and pay rates as well as overall work comp expense.

Okay, and then just finally, manager turn over at the branch level Steve; I think you mentioned that 50% of your costs are the variable compensation. Have you started to see any impact on manager turn over at the branch level? Is that something that you would be concerned about if you start seeing those mid single digit revenue declines, where maybe fewer of them are going to bonus, and maybe they have opportunities elsewhere? I don't know if they do, but perhaps they do. Have you seen any deterioration in trend there?

No, we haven't seen that relation happen at this point in time. Our turn over rates stabilized 18 - 24 months ago and remain fairly stable to date. Although bonuses are slightly less, I think that the bonuses in our larger offices, and we keep our finger on this, we're watching the total compensation, how much is pay for performance versus base, and going to stay on top of that. But we haven't seen those indications at this point in time Michel.

Okay, great. Thanks very much guys.

Our next question comes from the line of Mark Marcon with R.W. Baird. Please proceed.

Hi Steve and Derrek.

Hi Mark.

I'm curious, the worker's comp accrual reversal that you had for this quarter, how much was that?

It was about 130 basis points.

Okay. And then in December what was the actual by month same branch?

Hang with us for one second and we'll get that one for you. October was flat, November was down 3.1% and December was down 3.6%.

Great. And then in terms of -- what's your sense, in the markets that are softer, how is pricing holding up? Any impact?

Well it's hard to say any, there's obviously more talk about pricing pressures. We haven't seen our gross margins so far fall off. In January we've seen a slight decline in the minimum wage states, but it hasn't been huge. We expected it. I think Derrek even talked that we might have even guided down 30 or 40 basis points because of the minimum wage states. But the competitive pressure side, yeah we're hearing talks of it, but we don't see it falling daily. It's something we've got our eye on.

The nice part is our teams know that you don't -- you know you run out there and start lowering prices, that's hard to get back over time. Not that we don't want the sales growth, but it takes 5% sales growth to make up for 1% decline in margins, and our teams understand those formulas. They know what falls to the bottom line and they're out there fighting to hold their positions.

But at the same time, you know, we'll keep our finger on that as we see the full economic conditions unveiled to us in the next couple of quarters.

Yes, I mean, you guys do a great job on that. With regards to, just a little more color, with regards to the construction comments, Steve. Is it still all isolated to new residential construction?

I don't think so. You know, it starts there and it starts carrying over because we've seen larger fall offs in just our SIC code of construction than we believe we even had business in new housing. But as projects fall off in pure housing tracts, I think it falls over into remodels a bit. It gets impacted in, you know, maybe we're serving subs that aren't fully new housing. They're doing a little bit of more remodeling here or there. But, I don't believe it's 100% isolated in new housing.

Okay and at this point, are we at the early stages of it being national, do you think? Or, how far along - you know, if you take a look at your trends in Florida and then you extrapolate that out to the rest of the country, how far along are we in the majority of the states that you serve?

Gosh, that's a tough call, Mark. I believe we're at least half way into it for Florida and the southeast. The trends aren't worsening. I spend a lot of time every morning calling our branches and calling our sales teams and asking them how their day was the day before. The daily reports I'm getting back are that it's not worsening, even in Florida, where, on a year-over-year basis, it looks like it's been slaughtered. But, on a sequential day in and day out basis, no one's saying it's getting worse. They're all telling it like it's getting a little bit better.

But, what does Florida look like, on a year-over-year basis now?

I don't think we've given those numbers out by state but-.

Just at the Analyst Day, just, you know?

Yes. I can't remember the exact number. We gave a regional number then, but you know, I think that, for the most part, you know, I think we're seeing 15% to 20% decline in the state, as a whole.

But obviously, that one is much more exposed to construction?

Absolutely; absolutely and, you know, the teams, I mean, they tell me over and over, Steve, it was so easy to send construction workers out. The demand was so high and I had open orders for workers and Florida was growing at 30%-plus, for two, three years in a row. So, to see one year of barely getting into the double digits, it's painful. But, it's an adjustment. You have to know it comes at some point.

And, the manufacturing trends that you saw, were those - how did that unfold as the quarter progressed? Was that just in December? Was it worse in December than November, or how would you characterize that?

I don't have weekly numbers on industry specifics.

Yes.

I kind of get that on a more global basis on a month or it gets a little stronger by quarter. But it definitely worsens between third quarter and fourth quarter. And, by the time we finished quarter four, you know, the manufacturing numbers were negative for us, where they weren't at the end of quarter three.

Okay. How's Spartan holding up?

Doing really well; the developing branches, which are these branches one and two years old are just doing fantastic. The older branches, the nine that we bought that, you know, are primarily in Florida, have actually held up pretty well, given all the conditions that are in Florida. They're not seeing the same fall off that we've seen in our Labor Ready branches.

The Workforce branches that we bought in Florida have experienced about the same fall off, maybe even slightly worse than some of the Labor Ready offices. But, keep in mind that the Workforce branches were a lot higher percentage construction even than of the standard Labor Ready.

The owner that owned Spartan and Workforce, he said all of his outside work is construction and garbage work to handling work to Workforce and all of his inside jobs to Spartan. And at Labor Ready, we blended those in that brand. So, the construction mix at Workforce was a lot higher.

But, it's all explainable. We're happy with that acquisition. It's still producing great returns. And we see a bright future for Spartan, in particular in all the geographies that we can take on. The brand is maturing. Those leaders are maturing and we really are a one culture group, at this point in time, with Spartan.

Terrific, thank you, and good job on the cost discipline.

Thanks.

And our next question comes from the line of Jeff Silber, with BMO Capital Markets. Please proceed.

Thanks. I know it's late; I'll try to be quick. At the Analyst Day, you guys were kind enough to give us your sales by vertical, for 2005, in terms of construction, manufacturing, etc. Is that something you have handy for 2006 and for the fourth quarter?

You're referring to the full mix?

Yes, for the entire company. You put up a slide and construction was 39%, manufacturing was 18%. I just want to get the comparables for '06 if possible.

I don't have that in front of me, Jeff. We'll pull that together; we'll share it in a future call or a future release, okay?

Okay, but does it make sense that construction was 39% of the business in '05, manufacturing was 18% in '05, does it make sense that now, we're running below those rates?

Yes, slightly, because the fall off has been in construction. But it doesn't change the shift and they were working off some pretty big numbers. I don't know; that's about as far as I can comment without the numbers in front of me;

That's fine, okay. In terms of the accrual reversal, I think you mentioned it was a 130 basis-point positive impact on the fourth quarter gross margin. Do you have what that was for the prior three quarters?

No, I don't have it in front of me, those prior quarters. It was a 130 basis-point reversal. It was even bigger last year. It was 190 basis points, so we have to be careful when we talk about that it was a pick up on gross margin. The reason that the work comp expense is coming out about the same for the quarter is that our current year run rate has dropped down about 50 basis points from where we were Q4 last year.

Okay, that's fine and then just a couple more color on the first quarter guidance. I know you gave gross margin on SG&A and share count expectations for the year. What kind of numbers are you looking for, for the first quarter to get to your new earnings per share guidance?

Well, we really stick to an annual weighted average, Jeff. We're not giving anything specifically different on gross margin for the quarter than what we gave for the year.

All right, great. Thanks again.

And our next question comes from the line of TC Robillard with Banc of America Securities. Please proceed.

Great, thank you. Just a quick question, just for both of you guys. With respect to kind of the trend lines that we've seen coming out of the quarter, I mean, if we go back to the trends coming out of the second quarter, the trends coming out of the third quarter, what appeared to be stabilization then, midway through the following quarter tended to deteriorate further.

Looking at it now and kind of those trends you've seen over the last six months, what gives you the confidence that down 3% to 4% is really the right number as we go through the first half? Because, as you said, we've still got some tough construction comps. We've still got some tough hurricane comps, going through the first half. Just trying to get a sense as to where the confidence comes through that is truly the kind of bottoming out phase.

I don't think you've heard us say that we're calling it the bottom. When we refer to stable, if we excluded about three weeks around Christmas and New Year's, we can say that the declines of 3% to 4% have happened November, December and now into January, excluding about those three weeks or so.

We take that, we model it out on historical seasonality trends and take into account what we know of large projects or other shifts of movement of branches and such and we can come up with what we refer to as, you know, as based on these past eight weeks what the next eight, 12 weeks look like. I can't say much more than that, TC, beyond Q1. That's how we've always guided.

We give annual guidance at Labor Ready for the reason of we understand our cost structure better than anyone else. So, we'll throw our best estimate out there on the revenue line and where we think gross margins are headed. And, based on those levels of revenue, then we can give you a cost estimation. And that's really the reason that we look out further than even eight or 12 weeks, further than one quarter on our guidance. It's just to help out with that cost structure, especially when we were closing offices and then we were doing some acquisitions.

You know, we have the most stable cost structure that we've had in several years right now. Then, maybe we wouldn't need to give annual guidance. But, we've continued to give it just for the reason that we understand our own cost structure better. But, no, we haven't called the bottom. We've just said we've seen it stable the last six to eight weeks.

Okay, and can you give us some color around the commercial, non-res market? Obviously, still strong and still growing on a year-over-year basis, but the numbers that recently came out for the fourth quarter, the growth rates are certainly throttled back dramatically from kind of the prior, I'd guess, three to four quarters.

Obviously, you're going to have some tough comps with that. Has that been baked in there? Or, are you guys seeing anything different on the non-res than kind of the general numbers that are out there or kind of the broad macro numbers that are out there?

You know, we haven't seen the commercial numbers fall off. We had a couple large projects that ramped up quickly and then they fell off. But you pull those out, our commercial business has been very stable and still growing. But we all know that commercial construction has a longer backlog than residential And, will that have an impact, a lagging impact, that comes in 2008 or not? I don't know. But, heading into 2007, commercial construction looks very strong. And, from our customers' point of view, the backlog's strong enough to keep their momentum going through '07.

Based on that report, we're feeling pretty good about that. And, we haven't baked in a decline in commercial. We haven't baked in an acceleration either. But I think, in the near-term, we can say commercial construction looks good. I won't get into 2008.

Have you seen any change on the backlog? Or, has that been steady and growing?

We don't personally have a backlog like that, because we're in the short-term part of commercial construction. We're sending people out for a week or so on projects here or there. Even in our CLP Resources business, those projects average about three months. And so, we can't be looking into - we just don't have vision that goes out into 2008 at this point in time.

I can go off of what our sales teams are telling us, our professionals that are out talking to the customers. They're not reporting change in backlog at this point in time.

Okay and then, just my last question, the five to six offices that you've already signed leases for, can you tell us, geographically, where those are?

No, I don't have that list here in front of me. I would tell you if I had it. I just don't have that in front of me. Sorry.

That's okay. All right; thanks, guys.

And now our next question comes from the line of Clint Fendley, with Davenport and Company. Please proceed.

Thank you, good afternoon, guys. I wondered if you could provide a little more details on the competitive front. I know at your Analyst Day you noted that there had been some strength on the part of some of the regional competitors. Are you seeing any irrational pricing on the part of them, or, anything else, given the current market conditions?

Well, not beyond what I'd referred to a little earlier that here and there, our folks that have their feet on the street with the customers, day in and day out, there's some pressure on the pricing. But, not so much that we're dropping into that game. You know, the most important thing to us is maintain those current customer relationships. And to a T, I don't have one sales person that tells me that price can overcome loyalty. And, if we can keep that customer loyalty strong, the lower price from a competitor is not going to overtake them. And, that's 100% of everybody that I've talked to out there feels that way.

This is a very high touch business and if you've come through for your customer, day in and day out, those competitors aren't going to get onto your site.

However, with that said, we know that some regional players are making a charge forward in their business models. They're coming into some of the territories that we've operated in. And, again, with strong customer service and creating that loyalty in that relationship, we feel very sound that we'll be able to keep our customers happy, which is going to make it tougher in a tougher operating market environment for competitors to get much of a hold in 2007.

So, I'm not more concerned than I was in 2006. I take the competitive front seriously. We talk about it; we strategize about it but we know that customer loyalty and great relationships can overcome that pressure.

Thank you.

Our next question comes from the line of Christina Wu with Morgan Stanley. Please proceed.

Hi, I was hoping that you could comment on your cap ex. You provided guidance that you'd be spending $12 million to $15 million next year even though you've cut your guidance in terms of numbers of new locations that you're opening. How are you spending that extra money?

Well it is comparable with last year, and we've been involved in, this will be our second year going into it and revamping the front end system in our branches. It's been several years since we've done that and we're midway along, we don't think that's a good idea to cut it right now and we're expecting that to be a big branch efficiency improvement for us.

So you've got some cap ex in there this year, in '07 like we did in 2006.

About how much of the cap ex is allocated for that?

Oh it's probably $4 million to $5 million.

Okay. I was also hoping you could comment about previous increases in minimum wage, what the timing has been for acceptance by your customers.

Well previous timing of minimum wage, it's been under a little bit different conditions, but I will give you some background on it. Most of those have been two, three, four states that come along in a year, maybe five, somewhat spread out. This is the first time in quite some time, at least since I have been here that we've seen this type of volume come through. So in the past we've passed it through very quickly and adjusted bill rates to cover for margin very quickly. So we've had good success there in the past.

But with the volume of states that we've got this year and the demand for our services certainly is somewhat softer than we've seen in the past, there may be some temporary setbacks in our pricing and that's what we've incorporated into our margin.

Okay. Then one last question. In the past you've talked about experimenting with a loyalty program for your workers. I was wondering if there's any update on that initiative.

We've put it into one market in the southeast and one market in the northwest. Our workers are thrilled with it, it's fun to put them on our team with us, color them up with shirts and hats and actually have them working toward vacation days with us. Yes, we've seen that make a positive difference. Since it's only in two markets I don't have any numbers to share with you, but we're excited about creating this worker loyalty.

As we look forward and see the demand for our services being very sound in our long term strategies, creating the workforce of the future is high on our list of things to do. And this customer loyalty program, the timing of it is perfect, and increasing the average number of hours worked by each of these workers is going to be critical to us in fulfilling the demand that we see over the next three to five years in our business.

So thanks for asking about that. We're excited about those loyalty programs, and those workers that have been touched by it are thrilled.

Do you have any sense on the timing to roll it out to a broader geography, and any comment on the cost of giving the vacation days and other perks?

There has been no major impact on the cost of doing so. One you're recruiting less workers and signing less people up, and we're seeing that those costs are going to probably balance each other out. There might be a slight increase, but it's not going to be a major roll up. The roll out of it, Derrek could refer to it, we're upgrading our operating system that runs our branches, the information system. Part of that is some of the worker data that we haven't tracked in the past; it wasn't a critical initiative to us. But caring for these workers and tracking their data and understanding them really needs to be part of the information system.

Right now as we've built these loyalty programs we've kind of had to make shift it out of another system. And we're excited to have that in our system, it will be rolling out later this year, and that will make the roll out of these loyalty programs go a lot more easily.

Great, thank you so much.

Our next question comes from the line of Jim Wilson with JMP Securities. Please proceed.

Most of my questions have been answered. But guys with the strength of your balance sheet, I know obviously you've announced this further share repurchase, any thoughts on acquisition opportunities or taking advantage of all of that cash and trying to diversify or find new efforts, and how those are going?

We have a team that's working on that constantly for us, that understands the companies that are for sale in the United States and actually digging into some that aren't for sale. We're a disciplined company, therefore the pricing that we're willing to pay for a company, we don't chase deals. We're willing to pay fair market value, which is somewhat guided by the value of Labor Ready, what its multiple of cash flow is. We don't want to pay more than that, to be fair to our own shareholders.

We're looking for great deals and we have to project that into the future. But we do have a pipeline of deals that we've had in the process for the last 12 months. Some have come and some have left, and others are on their way and possibly the environment for completing the deal will get easier in 2007 with the pressure on demand for services in the light industrial arena. Since that's where our focus of acquisitions might be, is to expand that geographic presence of Spartan Staffing more quickly.

There's a couple of opportunities to tuck in some companies to the skilled trades division of CLP Resources, and that's really where we're focused, the skilled trades and the light industrial. It was a tough year in 2006, the private equity money that was chasing deals and pushing them above measures that we were not comfortable paying. We're not willing to take that risk for our current shareholders. To overpay for a deal, especially when it's not coming with great leadership or great systems, which are two things that we look for.

But our eye is still out there, we're still -- we still have a team focused on it and we believe it's a great opportunity that lies ahead of us in this company, is to do a few deals.

Okay, great. Then just one other question. Do you have the number of employees, either total field or [inaudible].

So total count is about 3,500.

And that's maybe 300 in corporate and the balance in the field, roughly?

Yes, pretty close to that.

Alright, very good. Alright, thanks.

Our next question comes as a follow up question from Jeff Silber with BMO Capital Markets. Please proceed.

Sorry, just one quick follow up. What kind of stock based compensation should we be modeling in for '07?

Stock based comp for '07 should be pretty comparable to what you saw for '06.

And the same kind of quarterly distribution as well?

Yes, that's right.

Okay so heavier in the first quarter, and then a little bit lighter ongoing through the year.

Yes it's a little heavier during the first quarter and then it's fairly evenly distributed through quarters two through four.

Okay, thanks so much.

There appears to be no additional questions at this time. I would now like to turn the call over to Steve Cooper.

Well thank you for being with us today. We appreciate your interest, your questions and your continued support of Labor Ready. We've got a great future here, and we'll work through these rough patches in the labor market adjustments, and we look forward to providing the great leverage that exists going forward. So thanks for being with us today.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a wonderful day.