TrueBlue Inc (TBI) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to Labor Ready's conference call. Today's call is being recorded. Joining us today is Labor Ready CEO Steven Cooper and CFO Derrek Gafford. They will discuss Labor Ready's 2007 second-quarter results which were announced today. If you have not received a copy of this announcement please contact Lisa [Wattrell] 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 Miss Stacey Burke for the reading of the Safe Harbor. Please go ahead, Miss Burke.

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 2007 second-quarter earnings 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 web site 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 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 be materially different. Additional information concerning factors which could cause results to differ materially is contained in the press release and in the Company's filings with the Securities and Exchange Commission, including our most recent form 10-Q and 10-K.

I will now hand the call over to Steve Cooper.

Thank you for joining us this afternoon to discuss our second quarter results for 2007. Earlier we reported net income for the quarter of $18.8 million or $0.41 a share as compared to $18.6 million or $0.35 a share a year ago. This is on revenue of $351 million, 3% higher than the $340 million of revenue in the second quarter of 2006.

The high end of our estimate at the beginning of the quarter for net income per share was $0.35. Derrek will discuss the details of the improvement to our forecast later in this call.

The high end of our estimated revenue for the second quarter was $345 million. The estimate reflected flat revenue as compared to a year ago along with $5 million in additional revenue related to an acquisition we completed during the quarter.

I am pleased to report that our organic revenue trends continue to improve in Q2 as they had during the first quarter. And we were able to produce about 1% of same branch revenue growth for Q2 as compared to the 3% decline we reported for Q1 of this year.

This positive momentum in revenue growth is a result of the increased selling activity we began in the fourth quarter of 2006. This increased activity includes daily marketing of our services through telemarketing; increased outside sales calls for employees; reactivation efforts with our customers that have not used our services in many months; and focused efforts to diversify our services into industries that are showing growth and stronger demand for temporary help. The bottom line is our efforts have been focused on the nuts and bolts of sales development and sales management.

When demand for temporary help in the residential construction industry was strong, we did not have to focus as much of our effort in selling our services in those high-demand markets. Therefore as demand in residential construction fell off in 2006, we refocused our selling efforts; and it has been paying off as our revenue is showing some improvement in many of those hard-hit markets.

Our revenue growth for Q2 also reflected revenue from the acquisition completed during the quarter. We were pleased with the sustained revenue levels of our newly acquired branches from Skilled Services that matche the level of revenue they were recognizing prior to our acquisition. These 17 newly acquired branches are being integrated into our CLP Resources operation. We are not only experiencing sustained levels of revenue from these branches, we are on track with our integration plans.

Over the past year, we have stated that we have seen a slowdown in revenue related to residential construction. We have not yet seen the demand for our services improve in this area. It has been about a year since the falloff began in demand for residential construction staffing; and it hit us the hardest during the last half of Q3 and during Q4 of 2006.

With the average branch revenue volume somewhat stable, we are encouraged that the back half of 2007 will show growth with seasonality taken into account. We also have reported the past couple of quarters that we have seen a general slowing of manufacturing across most geographies. We have also seen this trend show us some positive signs that things aren't worsening although overall demand has not yet shown signs of a recovery.

We continue to know that our services are vital for our customers in volatile periods so they can scale back their labor costs quickly and efficiently as their business slows. That is a big part of the value we provide.

It is our job as the management team to execute through the challenges that come with volatility and demand and that is exactly what I am the most proud of our employees for. They have taken the challenge of a slowing demand and found ways to place workers in many different types of jobs. We know that as demand picks up for our customers we will continue to be there for them to help grow their businesses, help them succeed and of course continue to drive the operating leverage in our own business model.

We have taken measures to control costs in several of our support services and administrative functions, which is allowing us to keep these costs from growing while we are in a soft revenue growth period and thus show that our own flexibility is a strong point in our strategy. We have also taken measures to control the costs in our branch operations. We have closed 20 branches over the last three quarters. At the same time, we held our new branch openings to about 20 in 2007 as compared to the 50 we opened in 2006.

Slowing our new openings and closing underperforming offices or consolidating marginally performing offices are measures we take to control operating costs in softer periods of demand. In addition our continuing branch operations have shown great controls of all of their operating expenses.

As the reacceleration of demand begins, and we continue to see positive signs of growth, we are ready to continue to drive the leverage in our business model through same branch revenue growth, and accelerate our expansion plan in all of our brands. Our CLP Resources division which supplies skilled labor, primarily to the commercial construction market, has been showing outstanding revenue growth during 2007 with almost 20% growth throughout the year.

In comparison to our on-demand brand of Labor Ready, CLP Resources does not have as broad a geographic presence. Therefore we believe the investment in new branches or further tuck-in acquisitions like Skilled Services will continue to provide great returns on investment.

Our international markets of Canada and the United Kingdom both have shown stable sales growth of approximately 10% on a constant currency basis throughout 2007. Our strategy to grow revenue and profits includes diversifying the industry served and the skilled set of workers placed. This strategy has been executed through the acquisition of Spartan Staffing and the acquisition of CLP Resources and now the tuck-in acquisition of Skilled Services into CLP.

We are pleased with the performance of these acquisitions. They continue to make a positive contribution to both our revenue and net income growth and they have produced excellent returns on invested capital.

Through the execution of our strategy to grow through acquisitions, 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 export further opportunities to acquire companies that are leaders in the blue-collar staffing niche that we can grow through geographic expansion and cross-utilize customer and worker relationships between our brands. We will continue this approach in a disciplined manner to ensure returns on invested capital continue well into the future. We have a vision to become the leading provider of blue-collar staffing by operating multiple brands within the blue-collar temporary help industry.

We remain confident with our core purpose in business of helping individuals grow and businesses succeed by connecting people to work. We are optimistic about the long-term demand for both skilled and unskilled blue-collar labor, especially in the small to medium-sized business markets, which is where our services are most widely used.

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

Thanks Steve. Good afternoon.

I am going to start by covering the major business trends that positively impacted our performance this quarter.

Our actual results exceeded our initial expectations for the quarter due to the following items. First, as Steve mentioned earlier, organic and acquisition revenue was better than expected. Second, gross margin came in towards the top of our estimate. And, third, selling, general and administrative expense as a percentage of revenue came in lower than expected, due to our revenue results and the associated SG&A leverage in our business.

Let's spend a little time now on our revenue trends for the quarter. Steve provided insight on the geographic and industry factors impacting our revenue performance. So I am going to focus on the key quantitative trends for the quarter.

This quarter's revenue increase of 3.3% came from the following components. Same branch revenue increased by .7%. Revenue from new branches provided 1% of growth. Closed branches decreased revenue by 1.1%. The acquisition of Skilled Services provided growth of 2.4%. And other items such as currency fluctuation provided .3% of growth.

I also want to point out our monthly same branch revenue trends for the quarter. April declined by .8%. May increased by 1.3%. June also increased by 1.3%.

Let me finish out the revenue commentary by providing some context on our revenue guidance for the third quarter. Our guidance of $390 million to $395 million represents revenue growth of about 5% which is comprised of about 3 points of organic growth and about 2 points from the acquisition of Skilled Services.

I also want to be clear on how we determined our organic revenue estimate. Our estimate is developed by taking our current weekly run rate and seasonally adjusting it for the rest of the year. Simply put, it does not make any presumptions about the change in demand of our services or in overall economic conditions.

Now let's cover some of the major trends in growth margin. Gross margin came in at 31.9% this quarter which was at the high end of our 31.5 to 32% estimate and about 30 basis points below Q2 last year. Our gross margin performance this quarter in comparison with the same quarter last year was the result of improved performance and workers' compensation expense offset by an increased in temporary wages as a percentage of revenue. Our estimate for gross margin for the remainder of 2007 continues to be about 31.5 to 32%.

SG&A expense was 23.3% of revenue for the quarter which is in line with the same quarter a year ago. Based on our revenue estimate for the year we expect SG&A to be about 23.8 to 24.2% of revenue for 2007. Based on our revenue estimate for the third quarter, we expect SG&A of about 22.3 to 22.7% of revenue.

Our income tax rate for the quarter was 36.5%, 50 basis points below our expectation due to better-than-expected performance on the Worker Opportunity tax credit. We do expect this performance to continue in and are lowering our income tax rate estimate for the full 2007 year to 36.5%. Our diluted net income per-share guidance for 2007 of $1.45 to $1.48 is based on an estimated weighted average share count for the year of about 47 million. The weighted average share count estimate includes impact of all common stock purchased so far this year but does not include the impact of additional purchases that may occur.

Diluted net income per-share for the third quarter of 2007 is estimated to be between $0.48 to $0.50. Capital expenditures were about $5 million this quarter. This brings our year-to-date CapEx to $11 million and we expect CapEx for 2007 of about $15 million.

We purchased about 900,000 shares of the Company's common stock for $18 million this quarter. This leaves $93 million still available for purchase under our current authorization. Year-to-date in 2007, we have purchased about 5 million shares of the Company's common stock for $95 million; and since the beginning of 2006 have purchased about 9.2 million shares for about $184 million.

Our No. 1 focus continues to be driving same branch revenue, due to the strong operating leverage in our business. This leverage produces incremental operating profit of about 20% on additional same branch revenue.

So that concludes our prepared remarks. We will now open the call for questions.

(OPERATOR INSTRUCTIONS). Mike Carney with Stephens.

First on the acquisition, Steve, I think you said $5 million of revenue in the quarter. Is that what you said?

That's what we had in for our estimate and the revenue came in at 8 million for the new acquisition.

Right. Okay, I got it. All right. And so I noticed that it shows that you -- looks like net of cash was $26.5 million, but the purchase price is $25.5 million and I thought there was some positive working capital with that.

So what is the difference there?

Yes, I'll take that. The -- I'm looking at what we've got in the cash-flow statements to see if I can agree with your number. So the $26.5 million that we have got in the cash-flow statement, the difference between that and the purchase price was the deal was done net of cash. So any remaining cash is just given back to the Company. That increases the price as well as the working capital adjustment so there's -- we don't get to keep excess working capital.

And then, No. 3, any of the costs related to the acquisition, due diligence and those types of things with attorneys' fees, those are also included in the purchase price to capitalize.

Okay. Got it. The -- I think you said the acquired 17 branches, was that net after you closed some redundancies? Because weren't there 21 branches?

In the initial press release we put out there were 21 branches listed there. Four of those locations though are non-revenue-producing branches, basically recruiting centers. So we have adjusted that count back to 17.

Can you, Derrek, can you give the bill on the pay rates year-over-year?

I can. Bill rate inflation for the quarter was 2.6% and pay rate inflation was 4.3%.

And what about workers' expense percent?

Workers' comp came in at 5.1% of revenue for the quarter.

Did you mention what July was, the comps so far, the first couple of weeks?

No, we haven't mentioned that. I can tell you though, that the results -- we haven't seen anything right now that would change our guidance going forward (multiple speakers).

So essentially running in the same line with the last couple of months?

Yes. It's running right about there. Maybe a little bit ahead, but you've got to be -- we've got to be cautious in taking a look at the first two weeks of the quarter because you have got the 4th of July holiday in there. Same thing as when we first go into the first of the second quarter, first couple of weeks. There is an Easter in there. So we don't try to draw a lot of conclusions from the first two weeks in those quarters.

One more and then I will get off, but on the -- clearly you did an excellent job in terms of cost control, almost surprising. What was it there that was different from prior quarters on the SG&A side?

One of the main things is what Steve talked about. It's additional revenue coming through and it's been a while since we've talked about that. We haven't talked about a lot over the last three or four quarters because the revenue growth hasn't been there.

But if you took our -- the revenue and put it in the middle of the guidance that we'd given, you would say that SG&A percentage coming out about where we had guided to. So the main thing there is the revenue.

Christina Woo with Morgan Stanley.

I was wondering if you could comment about revenue diversification for the core LaborReady and temporary staffing brands or on demand brands. Is 39% of the revenue still coming from construction?

That's close. We don't give an exact number. Maybe you've quoted the exact percentage but that's running very close to where we have been over the last three months. Six months actually.

Okay.

The last time that we talked about this publicly -- and we've been careful because we have been waiting to see where this really shakes out -- was for the full Company construction mix about 35% of the revenue. And last year we were on track until we hit the slowdown to hit about 40% of the Company's revenue from construction.

So it had been about roughly about a 5 point drop in that mix and as we talked about during the back half of the year and into first quarter, most of that -- not all of it but most of that -- coming from out of residential construction.

But now with the acquisition and the growth in CLP are you still estimating that on a full company basis, we should think about 35% or is it more like 40%?

There's not enough change there to move that mix a lot right now.

Okay. The next thing I wanted to find out, you've talked about the marketing, attraction you have been able to get with your marketing services, same-store revenues up. Why haven't you taken up your revenue numbers? You took up the low part of the guidance range; but it seems like there'd be greater opportunity if these marketing services are gaining the traction and I'm just hoping for a little more insight there.

We totally expected it to take off. I think that what you see is we've left the second half of the year revenue the same as our earlier projection. What we see is it just came on a little bit earlier this summer, due to some of these activities. So we got better results out of May and June than we had anticipated at the end of the quarter.

However as you can see in our back half projection we see that ramping into the -- all the way up to almost 4% on a same-store sales basis by the time we get to the end of the year so we'd already had that projected in. As far as earnings goes, we did bring up the midpoint of our guidance about $0.04 due to the gain that we had on the second quarter, but again third and fourth we already had ratcheted it up, based on what we expected from the efforts we were putting into the business.

Last question if you could just comment about new office openings, office prospects for 2008? I know you took down your growth -- you've taken down the growth somewhat for '07 would only two -- 20 new offices being expected. Should we think about '08 being similar to '07 or a little bit more aggressive on the office openings?

Right now we are probably leaning towards a little more aggressive in 2007. We would like to open about 5% of our base each year and for 2007 as one of our cost control measures in a tough demand cycle, part of the demand cycle we've pulled back during '07 that year in and year out we would like to say that number closer to 5%.

We will definitely make that determination closer to the end of the year before we make a commitment on how many we are going to open in '08, all based on demand for our services and in which brand. So but year in and year out we would love to see that closer to 5%.

Michel Morin with Merrill Lynch.

I was wondering, Steve, can you talk a bit about the M&A pipeline? How that's looking after having closed on this most recent one?

Yes. Well it is a constant process and we've commented before that that pricing is difficult, especially coming off of a strong 2006. The prices for businesses were going for higher than we were comfortable paying at the last half of '06 and into the first half of '07. That has loosened up a bit at this point. We see businesses more willing to listen in the current demand environment as you have all seen in the light industrial especially that things are soft out there.

So smaller businesses are more willing to talk to us. I think that pipeline is getting a little more full, but as you are well aware when we are talking about smaller businesses here -- $50 million in revenue or so type businesses. And these take a while to develop the relationship and move into -- through these acquisitions. It's not like putting two larger entities together where you can move a little faster.

But as far as pipeline goes we like the movement that we have seen the last three months.

Derrek, on the workers' comp, can you clarify if there were any reversals to prior year reserves?

Yes, I can. So workers' comp was 5.1% for the quarter and in that percentage is the benefit of about 90 basis points of revenue related to prior year reserves coming down.

Great. I think you just mentioned in response to an earlier question that there were some deal-related professional fees that had been capitalized as part of the purchase price. Can you break out how much that was by any chance?

No, I'm not going to go into that level of detail. But we did announce that the purchase price at the time of acquisition was $25.5 million. So the difference you see between what's on the cash-flow statement and that is No. 1, a working capital adjustment which is very common we have with all of these deals. And then No. 2, which is a smaller amount, is capitalization of professional fees.

Jim Janesky with Stifel Nicolaus.

Couple of clarifications, gentlemen. The first is, you said that the upper end of your outlook was $345 million. Did you say that the surprise on the upside to $351 million that $5 million came from the acquisition? And $1 million was better than expected revenues from the core branches? Is that correct?

No. The height of our guidance was $345 million after we had announced the acquisition -- .

That's what I thought.

-- services and we had added in $5 million. When we finished the last quarter the high end of our guidance was $340 million. And then (multiple speakers) $5 million in for the Skilled Services. That came in at $8 million. So then our core business would have from in another $3 million above expectations.

Okay, thank you. Derrek, do you have the breakdown of what the upside was in the earnings per share? You did that last quarter based upon revenues down to share repurchases.

No, I don't have it broken out that way, but I think you can run your own math on that. The differences between where revenue and SG&A came in at. You know it makes it a little bit easier this quarter to for you to do that because we didn't have a significant amount of share repurchase. So no I'm not running through and reconciling the earnings per share (multiple speakers).

Jim. We had bought most of that at the last earnings call so that was in our share count estimate. What was (multiple speakers) ?

That was my next question that you had bought everything back. You haven't really bought anything back since your last earnings call, right?

Not much to speak of.

Right. And can you comment on geographic trends? What you were seeing in the major geographies as you break out your revenues?

There's not much that;s changed from what we talked about in the past. Florida has definitely been hit the hardest. Some of the other Southeast states are recovering so that gives us promise. We are seen some good recovery up and down the Southeast coast and even into Atlanta.

So even inside the state of Florida, we see some pockets of movement that those that were hit first are starting to show some signs of recovery; and even different industries showing good signs of recovery in the state of Florida. So our long-term prospects down there we are pretty excited about. Outside of that everything is about on par especially in all material respects.

And what's driving the -- what do you think is driving the change within Florida? What has happened -- or in the Southeast within that geography that has allowed it to improve? Or is it all that you are taking market share based upon your sales efforts?

It is hard for us to say whether the market is growing or shrinking in such a short-term window. We don't have that type of pulse on the [full] market.

We do know that our own selling efforts down there have been outstanding. Most of the diversification efforts figuring out where to place workers outside of construction has really been that Southeast corridor. Many many other competitors have shown the same signs that we have shown down there. There have been competitors close their doors down there. That definitely helps us build our own market share, but it's really on a day-to-day management of our sales teams down there, of ensuring that the activity is taking place; that we are doing the right things to the right industries that are growing.

It seems like that's the fundamental blocking and tackling we should have been doing anyway yet when demand was so high for residential construction, it was all about customer service. If you took care of your customers and you could recruit the right number of workers and get them out to your customers, your business grew like crazy.

So there was just a little bit of retrenching and refocus to make sure we are doing the right efforts in the right industries.

Jeff Silber with BMO Capital Markets.

I hate to nitpick but I'm going to. You had a great quarter in terms of beating EPS guidance, but you only raised EPS guidance for the year by about $0.03; and then you just told us the tax rates are going to be lower than expected.

Are you being overly conservative or is there something maybe going on in the fourth quarter that we are not aware of?

What we did it to take a look back at our last earnings per share guidance and our new earnings per share guidance, the bottom line on what we did was we moved the midpoint of the guidance up $0.04. So then the question is, well, why not $0.06? There are some additional costs that we see coming in the back half of the year that were not in our original forecast. And those fall into two categories.

No. 1 is transition costs related to Skilled Services. We are anticipating some branch consolidations during the back half of the year between Skilled Services and CLP; and along with that comes some transition costs. The second category has to do with sales development efforts, both from a trained perspective and from an incentive and retention perspective. So those are the main reasons.

Any estimate in terms of the number of branches that will be closed the back half of the year?

I can say with Skilled Services there's potential of three to five consolidations there of that we are taking a look at. But outside of that we don't have any major plans. We will just take that one month by month.

That's fair. Moving on to -- on the revenue side and actually looking at the spread between the increase and the bill rates and the wave rate, it was probably the lowest we have seen in a while. Is that something that you anticipate going forward? Are we going to continue to see that widening?

I will talk about it in a couple of perspectives. We are when we are taking a look at bill and pay rates it's important to note in the inflation percentage there are dynamics that are going on in the current year and there are dynamics that were going on in the prior year. From a perspective of this year, we are seeing some stability and how I get to that is that our worker wage percentage, for the second quarter, is about -- as a percentage of revenue is about where we left off in March.

That is feeling pretty good to us. We were seeing an increase during the back half of Q4 and the first quarter of this year.

The reason that you are seen a little bit more of a spread there is during the summer periods over the last couple of years when we were -- our branch volumes were a little bit higher, we were able to bring our worker wage percentage down a little bit during the summer months as those branches were in peak operation.

So bottom line here is the increase in the gap between bill and pay rates has more to do about what was going on in the prior year versus our worker wage percentage going up in the current year right now.

That's fair; so again just going forward do we think it is going to kind of remain in that level for the remainder of the year in terms of its spread or the difference in the increases?

We are keeping gross margin guidance at 31 1/2 or 32%. So we think there's some things that we can work on on this percentage but we are not giving individual guidance on those gross profit line items.

That's fair. And actually talking about guidance you had given us gross margin guidance for the year. What are you looking for in the third quarter to hit your numbers? (technical difficulty)

Lastly, Steve, I'm trying to reconcile your comments from last quarter, particularly around the month of March, was that manufacturing seemed to be one of the bright points for you guys. Yet you seemed to be a little bit more downbeat in terms of the manufacturing environment through the second quarter. I just want to make sure that you weren't trying to kind of signal something or being very specific or if this was a case of I'm just kind of overly nitpicking around your adjectives that you used from one quarter to the next.

Yes. I will let you call yourself a nitpicker. I will be kinder. The interesting part there is, there was a little bit of a step up towards the end of Q1, but during Q2, it didn't continue to step. So there was a little bit of a positive tone in my voice probably about the results of March that we didn't see that carryforward, but it didn't worsen either.

Mark Marcon with R.W. Baird.

Great job, Steve and Derrek in terms of managing through this softer patch share. In terms of the areas where you are seeng some strengthening in terms of various industries where you mentioned that some of your core Labor Ready branches are able to shift over to industries that they are seeing growth. Where are they seeing the growth?

Can you restate that?

Sure. I was under the impression that during your prepared comments that you had indicated that your branch personnel were able to shift out of industries such as residential construction say in the Southeast or to industries where they were seeing decent growth and I was wondering what industries are those?

That's a great question. That's -- especially in those Southeast states and I will speak to Florida because that is where most of our comments have been focused. We had open orders for construction workers that -- I am not saying there was a complete worker shortage but it was a recruiting game for quite a long period of time.

When the residential construction slowdown hit in the state of Florida. all of a sudden there were excess workers and it happened about the same time that on a year-over-year basis the storms didn't recur. So all those Gulf Coast states there was actually quite a bit of swing the last 12 months with residential construction falling off and no hurricanes during 2006. Those two things combined put the worker pool back up and we weren't just filling orders to the construction companies anymore.

So it may not have been that there were industries growing, but there were needs in other industries. In services, retail trade, transportation has been solid. A lot of it in the retail trade and that's warehousing, moving goods in and out on a retail basis. There's lots of uniqueness that we have been looking for there, but down in Florida, just in general services, we hadn't really focused on training our employees down there on how to sell into these things that in other areas of our Company that don't have the strength or the strong demand for construction workers, especially residential construction workers, That they have always known how to sell into.

And so it is just small stuff. Not one industry and it's not necessarily that that industry was growing. There was just -- there might have always been a demand that was going unfilled because of the open orders in the residential construction. So a lot of it was just an internal refocus. I'm not sure it was an external industry search.

Got it. That's great. In terms of the geographies across the country, where are you saying -- are there any areas that are doing well?

Yes. There's many areas that are doing well. Some that, because of their prior year maybe they were doing that the year before, but some of the Midwest states, Chicago, Ohio, those Midwest [rust] that kind of leads into the manufacturing swing that we saw in March.

But just in general the pickup in those states has been quite well. We are still being somewhat sluggish, you know. The -- Florida and California which are two largest states have somewhat of a drain on us. But outside of that there's a little bit of drawdown in Las Vegas, in the Phoenix markets also. But you go outside of that and everybody is showing some good to moderate growth.

Then with regards to the pay bill spread. When do you think that narrows? How long do you think that will take before we can get that that to parity and maybe on the other side?

We haven't seen any sign of it yet, Mark, and we are being cautiously optimistic as we move to the back half of the year. I'm not -- we are not expecting to see any significant turnaround in our work or wage percentage going down significantly from where it is right now on a percentage of revenue basis.

How about the flipside in terms of raising the bill rates?

When I speak about worker wages as a percentage of revenue it's really got (multiple speakers) full dynamics in there.

Yes it does. And then in terms of SG&A as we start looking out longer-term do you think the investments behind the sales and marketing in terms of being a step up a little bit in the training would continue into next year? Or is it more of a onetime program or are you saying or do you have to even pay your internal folks a little bit more as things continue to progress?

I would characterize our costs related to that and the back half of this year as somewhat research and development oriented. There's nothing we are ready to go prime time with and talk to all of you about; but I can tell you that when we say our main focus is on driving same branch revenue there's no doubt that that is clearly No. 1. And to continue marshaling these average branch values and revenue bases forward, it is going to require some investment in sales development.

So we've grown these things to a little over or a little under $1.5 million in revenue and driving these up to $2 million, $2.5 million per branch it is going to require a more sophisticated sales approach.

Sort of what you did in Vegas and a few of those other markets?

Well, some of the test areas that we did in Vegas and some other markets were more about having separate teams. That is one option, but really where we need to go, where we have room for improvement is in our sales approach, is actually creating demand instead of just making people aware of it. And to create demand in a sales approach does take a more sophisticated effort, a more sophisticated incentive system, as well as a training program.

That sounds like something that if it's successful could carry into 2008?

Yes. That's absolutely right. It's making sure that throughout our culture it's a sales culture and not just one of an order taker. And that definitely that lasts for years. I mean we have set as our No. 1 priority to grow faster than the market. And to grow faster than the market in our same branch revenue, is going to take a strong sales culture to do so.

I guess what I was wondering is -- I mean, do you -- would you in that having a situation where you have got to invest ahead? And that you are going to continue to step up the investments? And then -- I'm trying to ascertain what the lag is between when you put in place these efforts to drive demand (multiple speakers)

There's definitely a lag and so we are actually just -- I wouldn't say we have opened up a firehose to flood the investment in. But there's a strong (inaudible) going in. I mean Derrek spoke to possibly $1.5+ million of new cost, $500,000 of that or so to -- maybe not even quite that much to the consolidation. But there is $1+ million of investment going on in the back half of the year.

And that's probably primarily focused to two things. One is training and one is making sure the compensation's set properly so we can recruit the proper sales team.

Now when I speak to sales tame I mean the branch manager. That's the primary salesperson in our organization. So we are increasing compensation for that position and we are going to step that up continually over the next few years, not just this fall. But we will let same-store sales pay for most of that.

Last question and I will jump off. How is Spartan doing?

Spartan is doing well. It's been a great acquisition for us over the three years. We have gotten great plans to grow that division. With the primary revenue being in the state of Florida it is definitely been hit for those reasons, but outside the state of Florida that brand is on fire and even inside Florida our teams are adjusting well to the demand circumstance there.

But given the fact that we bought nine branches, they were primarily in the state of Florida. We bought them. We've expanded it up to 30. Most of that expansion outside of Florida, but that's the younger branches. So again if I gave you the revenue growth number it is not that impressive overall because of that's skew towards Florida. But where we are looking at and we are very pleased with the prospect for Spartan Staffing nationwide.

Clint Fendley with Davenport.

Steve, as we approach August here and the beginning of the hurricane season, how should we think about the way that any potential storms might affect your business on both a near- and a long-term basis? Especially in light of the expanded footprint now in Florida with a skilled construction offering there?

I would have to have a crystal ball to answer that question with very much precision. I think I can state though that since there's no storm work built into our 2006 numbers anything, any storm would be incremental.

I can go back to 2005 when it was record storms; and it was adding going off memory about 3% growth. But those were very record -- that was a record year. We don't want to see that again, but so is not that material. But obviously to those branches that dealt the impact it is material to them. That Gulf Coast region all around.

Have you ever quantified how much of the sluggishness that you have seen the past few quarters there in Florida might be due to the light hurricane season that we had last year?

No, we haven't. It's so hard to call out when somebody is out doing a repair job of whether it is ongoing construction or whether they are actually doing something that was caused by storm damage. It is fairly easy to quantify in that first six weeks or eight weeks after the storm how much is cleanup. But it's hard to pull out how much is long-term growth in construction because of the storm.

So would it be fair to say if you had six to eight weeks of cleanup where you had just the on-demand offering before where you might have a bit more of a longer-term effect, given that you have a skilled construction offering there now?

I think on the skilled side there wouldn't be a short-term impact. We would have to, obviously, you lose a little revenue during the middle of the storm. But on a skilled basis it's -- those offices wouldn't see the quick pick-up that our on demand offices the because most of that on demand office is cleaning up after the storm.

Jeff Silber with BMO Capital Markets.

One quick follow-up. In terms of stock-based comp expense what should we be expecting for the next few quarters?

Well stock-based comp, (inaudible) around here was slightly less than $6.5 million last year and we are expecting about that same amount this year. So if you take a look and it's there on the cash-flow statement. It has been very consistent quarter-over-quarter in comparison with the same quarter a year ago. So I think you are pretty much on track if you're looking back at last year.

Then to get to the 47 million shares outstanding for the year it looks like you would be ramping up your diluted share count at least for EPS calculation purposes the next couple of quarters. Are some options kicking in or is there something going on that we should be aware of?

No. We traditionally -- that share count that weighted average share count all other things being equal has grown maybe a couple hundred thousand a quarter. Based on option exercises sometimes we have promotions. We have new people coming in. But that 47 million is with the exception of those -- of that couple hundred thousand growth a quarter that we have -- is just where the weighted average math works out from the buybacks we have done so far.

Mark Marcon with R.W. Baird.

In prior quarters you talked a lot about minimizing the accident rates that you saw in terms of workers' comp. As the mix is changing here a little bit what are you seeing from that perspective or what are you seeing this in terms of accent rates and how should we think about workers' comp going forward?

We've only disclosed statistics on it once we've gotten to the end of the year. The last one that we disclosed was that accident rates were down about 15% last year.

Probably one thing that is on some people's minds is as we have less construction mix, will that have a decrease in our accident rate? There might be some of that but we are not seeing a lot of that because we've made such big progress on accidents already this year.

So there could be a little bit of that, but we are not seeing a major trend in accident rate changes from the mix change.

So how are you -- and how long do you think we can keep getting the workers' comp accrual reversal that has been going on for seven quarters now? And you have been completely transparent about it. Do you think that -- and I know it's hard to say but are we getting to the point where you think that starts slowing down a little bit or do you think we still have a long ways to go?

There's not a lot I can offer there. You know the actuary comes in, gives us the best estimate every quarter. That is what we book to and every quarter what they are taking a look at is a lot of factors. But a couple of the main things is where medical inflation is running, changes that are occurring in state laws as well as accident rates, and how severe our accidents have been.

So really what we are coming in with every quarter is the best estimate on where that work comp liability should be. So I just can't give you a lot of perspective in the future on that one.

But when you are giving us the guidance particularly in the top end, are you taking into account the potential for some reversals, again, based on the probability that it is probably going to occur given the track record that we have seen thus far and the nature of actuaries when they go through?

We are making -- when we put our guidance together we are putting our best estimate together on all the factors and gross margins, payroll, taxes, where worker wages are going to be; where work comp is going to be and we are giving you our best estimate in its totality.

That's what we did for this quarter. That is where our results were towards the high end of that range but we are just giving you the best overall estimate that we can give you looking forward as we see it today.

Mike Carney.

I lost you so hopefully you didn't already answer this, but what area, Steve, of acquisitions are you continuing to look at? Is construction still something that you would be focused on or are you done there?

No we are not done there. CLP Resources is a very significant platform for us. We've grown that thing up to well over $2 million on an annual revenue basis and we would like to see that division doing $500 million. To hit that number will require a couple more regional tuck ins and the strong same-store sales growth that they are producing. And I believe over the next three to four years, five years we can hit that $500 million number.

There are not a lot of large and I say large to even the size of Skilled Services where there are 20 branches doing what CLP Resources does. So it is not easy to go out there and round three or four of these up but are might be one or two available in that area. Most of the CLP Resources growth will come through organic openings to drive that $500 million number.

Other acquisitions and things we are looking for, the Spartan Staffing -- which does the semiskilled manufacturing transportation logistics type work, inside work, longer-term staffing work -- they are approaching $50 million in revenue. We want that to be a $500 million division. There is going to the a lot more acquisitions there.

We are finding the price points to be getting closer on the people that are selling their businesses. We have the opportunity to make a step forward in that line and I would believe that that is where you would see a few more acquisitions done in our business.

In the on-demand leg of our business we've pretty much covered most geographies. It's a same-store sales effort. These comments we made here today about continuing to grow our sales development and the quality of the salespeople we have onboard -- and, again, I'm referring to the branch managers and their staff -- and the training we are giving them is really where that investment and we are going to grow really through same-store sales in that division.

So acquisition-wise, the pipeline is looking good in light industrial and I think that we will be able to put some good capital to use and bring them under our control systems that we have that can continue to produce great results.

And timing, does that depend on the valuations right now? Obviously you have a little less cash than you did a year ago. Or does it just depend on -- or are you waiting a little bit of time like you have historically between acquisitions to be able to focus?

That's kind of a mixed bag that answer that question. Quite honestly in the light industrial, the Spartan name we were -- we stuck a toe in the water with the nine-branch operation down in Florida. We grew it to 30. We liked the results. We can see that we know how to run that business now. It works well strategy-wise. Within -- against -- up against our LaborReady branches we didn't want to be cannibalizing our LaborReady operations.

With that test behind us, now it is all about, do we have the control systems and ability to manage and control this business? We are getting a lot more comfortable with that answer.

Without that answer, we were looking for a little bit larger platform to possibly buy and pricing was too high for a larger platform. We are very comfortable now that buying a business the size of Skilled Services in the light industrial arena, we can tuck that in to our current management team, our current control systems and so we've cleaned up a lot of the reasons we haven't been aggressive.

We are not a real aggressive acquisition integration team. We are cautious. We don't want to make a mistake there. We have a lot of good going for the investors in our own core business. As Derrek mentioned and I've mentioned here growing same-store sales is our No. 1 focus. We are not losing track of that. Our on demand team is very marching to the same tune on same-store sales; and with these additional sales development efforts that's our No. 1 priority and will continue to be.

Opening in new geographies for both Spartan and CLP is our No. 2. And then as opportunities arise, and we are searching -- we are not just sitting here waiting for the phone to ring -- We will do some more tuck into those three platforms. LaborReady, Spartan and CLP and I think all in it's going to be a great strategy.

One thing you can't see that they all have in common is they're blue-collar staffing companies and we are not reaching out beyond blue-collar industrial commercial type staffing. We are going to stay focused on that. We know how to control the risks. There is not another publicly held company that is making an aggressive run in this area and we think we believe that we are ready.

We have the right management team to do so. The right systems? And as far as capital goes that part of your question no. We have not returned too much capital to shareholders. We still have $93 million. We believe we could return that $93 million and do acquisitions at the rate where we believe we can integrate them with our current capital structure. I think we're right were we want it to be.

Thanks a lot. Good job.

At this time I'd like to pass the call back over to management for closing remarks.

Thank you. We appreciate you being with us today and going through the results of the second quarter and our outlook for the rest of the year and sticking with us through the Q&A. We look forward to talking to you and updating you further next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This presentation has now concluded and you may now disconnect. Good day.