TrueBlue Inc (TBI) 2007 Q3 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's President and CEO, Steve Cooper, and CFO Derrek Gafford. They will discuss Labor Ready's 2007 third quarter results which were announced today. If you have not received a copy of this announcement, please contact [Teresa Burkland] at 1-800-610-8920, extension 8206, and a copy will be faxed to you.

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

Here with me today is Labor Ready's CEO and President, Steve Cooper, and CFO Derrek Gafford. They will be discussing Labor Ready's 2007 third 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 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 on 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 our Company's filings with the Securities and Exchange Commission, including our most recent Form 10-Q and Form 10-K. I will now hand this call over to Steve Cooper.

Thank you for joining us this afternoon to discuss our third quarter results for 2007. Earlier today we reported net income for the quarter of $23 million or $0.51 a share, as compared to $25 million or $0.48 a share a year ago. This was on revenue of $391 million, 4.4% higher than the $374 million of revenue in the third quarter of 2006.

The high end of our net income per share estimate at the beginning of the quarter was $0.50. As mentioned in our press release today, we purchased 2.5 million shares of our outstanding stock during the quarter, which added $0.01 per share to our net income. Therefore even without the additional share repurchase this quarter our results reflect the high end of our earlier expectations.

Our revenue estimate for the third quarter was a range between $390 million and $395 million. The estimate reflected our expectations of organic revenue growth to be about 2% and acquired revenue growth to be about 3%. As reported, our acquired revenue came in as expected, and our same branch revenue growth was slightly below expectations at 1.2%.

The operating environment has remained a bit more difficult than we had earlier estimated and remains so today. I'm pleased that even in a challenging operating environment our teams were able to produce positive same branch revenue growth along with consistent gross profit margins as compared to the second quarter of this year, despite the minimum wage increases we have absorbed throughout the year.

Our trend during the first half of 2007 showed accelerating branch -- same branch revenue growth. In Q1 we reported a decline of 3% in same branch revenue, and in Q2 we reported a positive 1%. With that trend we had expected Q3 same branch revenue growth of 2%. And we were expecting slightly higher than that in the fourth quarter. With the trend substantially consistent at 1% same branch revenue growth compared to Q2, we have adjusted our revenue estimates to reflect this trend, and we are now estimating revenue for Q4 in the range of $345 million to $350 million.

We have also reported the closing or plans to close 35 additional offices in Q3 and Q4 combined. And this will reduce our Q4 revenue by an estimated additional 1%.

With the announcement of the closing of these additional 35 branches this will bring our closings during 2007 to approximately 47 offices. We are a disciplined Company and we will continue to use the flexibility of our business model to control costs and scale our operations to meet the expected demand.

In addition to the branch office closings, we have also reduced, and will continue to reduce, operations and support services employee headcount and other operating expenses to match the resources needed to the demand of our services. At the same time we are controlling operating costs, we are continuing to make investments in our people through more focused leadership and sales training.

We believe that now more than ever our operations and sales teams need to be focused on delivering the highest customer service possible. Understanding that our customers have costs to control, as their own demand and needs fluctuate, is the primary driver of our business model. Our training is focused on developing stronger customer relationships and putting ourselves in our customers' shoes to better serve their fluctuating needs.

We are also continuing to focus on increased selling and marketing activities. These increased activities include the daily marketing of our services through telemarketing, increased outside sales calls per employee, reactivation efforts with customers that have not used our services in many months, and focused efforts to diversify our services in industries that are showing growth and stronger demand for temporary help.

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 pick back up in this industry. It has been over a year since the falloff in demand for residential construction staffing began. And it hit us the hardest during the last half of Q3 and during Q4 of 2006.

When demand for temporary help in the residential construction industry was strong we did not have to focus as much 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.

We've also reported in the past couple quarters that we have seen a general slowing in manufacturing across most all geographies. We have also seen that this trend has not yet shown signs of a recovery, although we have seen good growth trends in the transportation and logistics industry, along with the general services.

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. We have taken that challenge of 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 business, help them succeed, and of course continue to drive the operating leverage in our own business model.

As mentioned here today, we have taken measures to control our operating costs by reducing branch count, headcount, and reduced costs in several of our support services and administrative functions. This is allowing us to keep those costs from growing while we are in a challenging period, and confirms that our own flexibility is a strong point in our strategy.

As the reacceleration in demand begins and we see positive signs of growth, we will be ready to continue to drive the leverage in our business model through same branch revenue growth, and accelerate our expansion plans in all of our brands.

Our strategy to grow revenue and profits includes diversifying the industries served and the skill set of workers placed. This strategy has been executed through the acquisition of Spartan Staffing and the acquisition of CLP Resources, and now in 2007 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 explore further opportunities to acquire companies that are leaders in a blue-collar staffing niche that we can grow through geographic expansion and cross utilization of our customers and our worker relationships.

We will continue to approach this in a disciplined manner to ensure that returns on invested capital continue well into our future. Our vision is to be the leading provider of blue-collar staffing by operating multiple brands within the blue-collar temporary help industry. 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.

Our annual Analyst Day will be in New York City on November 14. Please contact us if you need further details on attending. At that meeting we will be discussing our strategies to become the leading provider of blue-collar staffing and how we plan to grow three distinct lines of business in our organization, those being, one, the on demand or general labor group, which is our Labor Ready brand; two, the light industrial group, which is currently our Spartan brand; and three, our skilled trades group, which is currently the CLP brand. We are excited to share with you on November 14 our vision and strategies to grow each of these lines of business.

At this time I'm going to turn the call over to CFO, Derrek Gafford, for further details on our operating and financial trends. And then we will open up the call for any questions that you may have.

Good afternoon everyone. I will spend a few minutes following up on Steve's business discussion by pointing out the key business and financial trends for the quarter, starting off with revenue.

Revenue for the quarter was nearly $391 million, which was towards the bottom of our estimated range of $390 million to $395 million. This represents total revenue growth of 4.4% in comparison with the same quarter a year ago. 3% of the revenue growth was from an acquisition in a previous quarter, and 1.4% from organic growth. Organic revenue growth this quarter was about 1 percentage point lower than we expected.

Total revenue growth this quarter was comprised of the following components -- same branch revenue increased by 1.2%; revenue from new branches provided 1.1% of growth; closed branches decreased revenue by 1.4%; an acquisition in a previous quarter provided growth of 3%; and other items such as currency fluctuation provided 0.5% of growth.

I also want to point out the year-over-year same branch revenue trend by month -- July increased by 0.5%; August increased by 1.5%; and September increased by 1.7%. While we experienced acceleration in our same branch revenue this quarter, we did not achieve the level of growth we had expected. We expected more robust growth as we move through the third quarter due to the softer prior year comparables related to the residential housing declines starting in the third quarter of last year.

For the fourth quarter this year we expect revenue in the range of $345 million to $350 million. This represents total revenue growth of about 3%, which incorporates about 1% of additional loss revenue related to branch closures we announced this quarter.

Now let's cover some of the major trends in gross margin. Gross margin was 32.1% this quarter, which was above our estimate of 31.5 to 32%. Our gross margin performance was the result of lower workers' compensation expense and stabilization in our temporary wages as a percentage of revenue.

The operating and risk management teams continue to focus on reducing work-related injuries. Year-to-date the number of claims is down about 10% in comparison with the same period last year. Work comp expense as a percentage of revenue was 4.7% this quarter. And included in work comp this quarter was a reduction to prior period reserves of about 1.2% of revenue, which was higher than the reduction received same quarter a year ago of 0.8% of revenue.

Temporary worker wages as a percentage of revenue remained stable with Q2 this year, which was a big success for us. To put this in perspective, we have experienced minimum wage increases in about 50 states, provinces and territories this year, half of which were put into effect during the third quarter this year.

To maintain our gross margin, rates to our customers have to be increased for any pay rates below minimum wage, plus the additional markup needed to maintain our current gross margin. This requires disciplined execution throughout our operations due to the sometimes difficult conversations that must be held with our customers. Our estimate for gross margin for the remainder of 2007 continues to be about 31.5 to 32%.

Sales, general and administrative expense as a percentage of revenue was 22.8%, which was about 30 basis points above our expectations. The higher SG&A percentage was primarily the result of $1.3 million of expense related to the 35 branch closures announced today, 19 of which were closed in Q3, and 16 planned for Q4 this year.

The majority of these branches have or will be consolidated with a nearby branch, and all but four of the branches are within the Labor Ready business line. From a geographic perspective 8 are in the United Kingdom, 15 in Florida, and the rest spread across other states.

Also included in SG&A this quarter is approximately $1.5 million of incremental SG&A, related to branch openings for 2007, our sales development activities and transition costs related to the acquisition completed during the second quarter this year. Based on our revenue estimate we expect SG&A to be about 24.7 to 25.1% of revenue for the fourth quarter this year.

Our income tax rate for the quarter was 36%, which is 50 basis points below our expectation due primarily to better-than-expected performance on the Work Opportunity Tax Credit. Our expectation for the fourth quarter and the year as a whole is now 36.3%.

Diluted net income per share for the fourth quarter of 2007 is estimated to be between $0.32 to $0.34, and is based on an estimated weighted average share count for the quarter of about 44 million. The weighted average share count estimate includes the impact of all common stock purchased so far this year, but does not include the impact of additional purchases that may occur.

I do want to remind everyone of some events that occurred in fourth quarter of last year. During fourth quarter last year we received an additional $0.06 per diluted share related to the retroactive renewal of the Work Opportunity Tax Credit, as well as favorable state tax adjustments. We also reported a record high gross margin of 32.6%, which is 60 basis points above the high end of our expectation for fourth quarter this year. This equals about $0.03 per diluted share. We're not expecting these events to reoccur during fourth quarter this year.

We purchased 2.5 million shares of our common stock this quarter for $53 million, which added about $0.01 to diluted earnings per share this quarter. This leaves about $40 million outstanding on our common stock buyback authorization.

For the fourth quarter we expect about $2 million to $3 million of additional CapEx. As we look ahead, we're clearly focused on three priorities. First and most importantly, is continued focus on growing same branch revenue due to the 20% incremental operating profit it drives. Second, is continuing to use the flexibility of our business model to rigorously control costs. And third is continuing to put our capital to work through stock buyback and attractively priced acquisitions.

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

(OPERATOR INSTRUCTIONS). T.C. Robillard, Banc of America Securities.

Just a couple of questions. First, Derrek, can you give us a sense as to how much cash you guys need, or would like to keep on your books in terms of running the day-to-day operations, and I am sure kind of what your clients want to see?

We have talked about running a balance of $40 million to $50 million. And included in that balance we have on average have got about $20 million of cash in our CDMs and about $5 million in lock boxes. It is not directly accessible at any point in time. So that leaves us about $25 million to run the day-to-day business and that should give us plenty of room.

Perfect. Can you give us a little bit more flavor as to how the same branch trends have been in the early part of this quarter, because based on your numbers you guys saw some pretty good acceleration in August and September. I'm sure little bit easier comps, but it would seem that your comps continue to get easier as you go through the fourth quarter. It just seems that your outlook is a little more bearish than what you guys came through September with. So did you see something slow down dramatically as we came into October, or is that just conservatism? Can you just give us a little more color their?

It is really related more so that we would have expected September to be stronger than the 1.7%. Although both August and September were between 1 and 2% same-store sales growth, we were looking for that to trend stronger in September to give us the signals that October and November would come in where we had earlier expected.

We just took our same approach that when we get to this point in the quarter that we have to really rely on those last eight weeks as our best indicator for the next eight weeks. We have been fairly close when we pay attention to those trends. And that is some of the disappointing remarks that were made here today of going -- we thought we would be a little ahead of where we are right now.

Then just lastly, Derrek, in terms of the drop-off year-on-year in operating margins, gross margins you guys did really well there. It was only down about 20 basis points year-on-year, but you saw a much bigger draw on the operating margin side. What was behind it? Was some of that some more of the branches closings that ended up impacting your SG&A, or is there something else in there? Because it sounded like you continued to do really well on the workers' comps side.

There's a couple of things that I mentioned in the prepared remarks that I will hit on a little bit. The first is for those branch closures that we announced in the press release we had $1.3 million of costs there. That is equivalent of about 30 basis points of SG&A on a percentage of revenue basis. And if you take that out, it would have put us right in the middle of the SG&A guidance that we gave, or that we talked about as we entered into the third quarter.

There were some other costs related to sales development and some transition with our Skilled Services branches that we were consolidating. Not a lot, but a little bit there. And also keep in mind that we've got 22 new branches or so that have opened up this year that are still ramping up their revenue, yet the full load of SG&A is in there that wasn't there last year.

Christina Woo, Morgan Stanley.

You have mentioned spillover. You mentioned residential construction weakness and closing 15 offices in Florida, maybe speak to that. I was wondering if you could comment on whether you have seen any spillover into the nonresidential construction market?

I think that if I reflect back on our comments and how we saw the year come together, that the first impact that we saw a year ago in Q3, the first part of Q3, is definitely cancellation of construction projects that were underway, and large quantities of workers just being sent off the job site. And really in the state of Florida is where all that started.

We took our earnings -- our revenue estimates down for that at the beginning of Q3 a year ago. When we got into Q4 a year ago we saw that that had spread a little bit and had developed a lot worse than we really expected. Then as we got into Q1 of '07 we did see that it was spilling over into transportation, such as waste hauling and the port business that transported building materials in and out of the state. As the quarter developed we even saw then manufacturers and distributors of tile and building materials and such like that.

That is about what we currently see is those types of direct peripheral type industries that impact residential construction being impacted, and especially in the state of Florida. Now obviously there's lots of talk of whether the housing slump or draw back is going to feed over into the rest of the economy. And I will leave that up to the economists to make those calls of how that is going to be impacted. But what we did see is those neighboring or those peripheral industries that support construction being impacted in Florida.

Then no doubt as we got into Q2 we did make comments about California, and especially Southern California, and a little bit about the state of Nevada, where lots of construction was going on and unemployment is on its way up. There is quite a bit of impact to the housing market in Southern Cal and Nevada too. That is not really news from last quarter, but that is news over the last year as we have developed it.

In your prepared comments you had mentioned some amounts like $1.3 million related to the cost of branch closings. Was that all taken in the third quarter, even though you will have some branch closings in the fourth quarter? Or put another way, should we also expect in the fourth quarter that we will see some rise in SG&A from the branch closures?

The ones that have been announced so far, we have booked an accrual for the estimated closing cost of those. So the ones that are in the press release today. Now whether we evaluate further offices, we haven't made any determination of that. But of the announced closings today all the cost -- the closing cost have been accrued.

Somewhat related to just the branch closures, I was a will bit surprised to see that number being as high as it is. Has there been any shift in employee morale as a result of that?

Obviously, it would be crazy to say no. These are branches that close that people had their heart set on and building. Most of them were branches we had our eye on during the year, we were hoping some momentum as we moved into the third quarter and it didn't happen.

As Derrek mentioned, 8 of them are in the United Kingdom, and we closed 8 in the United Kingdom about a year ago. So our branch count in the United Kingdom has gone from just about 50 down into the low 30s. And we continue to watch another 5 to 10 offices very closely over there.

So, yes, morale there, because we had so much momentum moving in the United Kingdom earlier in the year and it just kind of stalled. And we made a decision that enough is enough. And we don't know where that economy is going, and we didn't want to carry those throughout '08, and it was time to cleanup that operation.

Now a big chunk of these came out of the state of Florida also. And it is really our first time that we have closed a significant number of offices like that in the state of Florida. Florida has kind of been our growing market the last seven or eight years. And obviously, not including the last year, we have struggled down there. The residential housing market has been tough.

And we have reached a point down there that we were running -- as part of acquisition that we did in the spring of 2004 -- we were running a brand by the name of Workforce that we had bought along from -- with Spartan Staffing. And we had been growing that brand and it had been going nicely, and we were trying to make a determination of whether we're going to continue to grow that brand. And I believe that the results of 2006, or the last half of 2006, and into 2007 just told us it is not the right time to be running two brands down there delivering the same service model.

So although we continue to run -- now we closed the Workforce brand is what I'm telling you. So a lot of these closings had to do with consolidating, taking the employees out of one office or the other, moving them together, taking the best location of the two, but rebranding those branches into Labor Ready. So we will not be running the Workforce brand moving forward. So that decision was also made.

That is a mixed bag on morale. A lot of people buy in a division, and what happens if you are not growing your brand those employees don't see a solid career path, and it is hard to hang onto them. Now we have given them a solid career path. They are part of the Labor Ready family fully. And since they were delivering the same service model into the marketplace, it really made a lot of sense. And so I really believe we will have a pickup in morale, not a drop-off in the state of Florida because of this consolidation.

Clint Fendley, Davenport.

Steve, you commented that you were watching 5 to 10 offices over in the UK. Can you provide any color on the additional offices that remain on your watchlist as we look forward to 2008 within the U.S.?

Actually these closings in Florida weren't due to that we were losing money or losses. This was more of a business decision. The U.S. has been fairly clean, and even with the falloff in Florida and Southern California, the branch count or the branch sizes were so large, they are so far from us risking losing money. Which is somewhat of a challenge for us because it is hard to control costs and do consolidations in these downfalls, and that is why it took a full year in Florida for us actually to start closing some offices, until we actually knew where it was settling out. But the short answer is there is just nothing to speak of the branches that are losing money here in the U.S.

Are any of the branch closures related to the Skilled Services Corp acquisition? And could you maybe provide a little bit more color on -- I know you said you were pleased with how they did during the quarter, but a little bit more color on their results there?

Part of the integration plan there was too quickly move to the -- have the CLP brand be the dominant brand. And we announced that to the employees and the customers. And we're running somewhat of a dual brand, a Skilled Services by CLP type model throughout the rest of this year, and that has gone very well.

When you do an acquisition like that, especially since the bulk of their revenue is in the state of Florida, obviously a lot of the focus on commercial. We had given ourselves room to take quite a haircut on the revenue, and we didn't have to take that haircut. So although it is not growing, it is very stable, it is what we bought. So that is what we are very pleased about. And it is producing better than if we would have had to take the haircut, which we didn't have to take.

As far as the full integration plan, three of the closings were due to the integration, but those were planned at the time that we bought SSC.

Mike Carney, Coker & Palmer.

Steve, I think you -- what did you mention in October or so far the same branch sales growth was, or what was expected in the guidance?

I didn't mention any of that, but it is similar to how September ended. So August, September were fairly consistent, and October we're heading in the same numbers.

Then plus I think, Derrek, you had mentioned that 1% -- an incremental 1% of revenue would be lost from the branch closures? Is that what you said?

Yes, that is roughly about what it should pencil out to be.

So around 2.5% would be the loss from branch closures?

Yes, that is based on where we have been trending through this quarter plus that. That is about right. There's a few branch closures that we were doing that we had prior to fourth quarter last year that will drop-off, but not many so that is pretty close.

Then what was the bill rate and pay rate? You said they were the same essentially.

They were pretty close. Let me give you the exact percentages. Bill rates were up 2.4% and pay rates were up 4.4%.

My question is, I am sure you all have analyzed this, but if we -- now that you have minimum wage increases that are substantial every six months, what -- is that bribing the lower sales growth than you would had expected, because essentially with such large minimum wage increases, and assuming that your pay rates are going up similar, it is strange that your pay bill differential is not much more.

There weren't any minimum wage increases that we're going through this quarter that we weren't aware of. So we knew all this was coming through. Now this is very difficult to measure, but there is no doubt that these minimum wage increases in the short term put some drag on revenue growth. In the long run for same branch revenue these things are positive. But in today's environment these are difficult conversations to be had with customers, and it does produce some drag on short-term revenue growth.

So while we're not pleased with the level of same branch revenue growth that we have got right now, we experienced very little slippage in gross margins this quarter. And that was with close to 25 minimum wage increases, so maintaining that margin and still keeping positive sales growth is -- I won't say pleased with it, but we're glad that we made it through that way.

Between this July minimum wage increase and then the states before that, if you look at certain states do you see the ones that are having the larger increases having a tougher time with the sales?

Yes, there is some correlation there. There is just a lot going on in the overall economy though. It is hard to single it out and put it just to that, because there are so many moving parts, but that would be consistent with our expectation. But there is just a lot of moving parts going on in the economy right now, so it is hard to tie down a struggle in one particular geographic area to just minimum wage increases, but it certainly doesn't help.

Steve, you may have mentioned this too, but how many closures were not Labor Ready's that weren't also a -- like weren't also a Florida -- essentially how many were CLPs or Spartans?

Of the closures that we announced this quarter in the press release, all were in the on demand business line with the exception of four, three of which were in skilled trades, which were planned consolidations with the acquisition of Skilled Services, and one was in the Spartan brand.

Essentially the commercial side, the CLP and the Skilled has remained fairly robust?

Yes, it has. Obviously with a large portion of our revenue from CLP being in California, we've got our eye on that. And the California economy has not responded well the last two quarters. And CLP has had strong revenue growth, but we've got our eye on that. We're a little concerned about what the California economy might do to both our own -- the on demand branches and the CLP branches.

One more. Derrek, there was a much higher D&A than normal. What was attributed to that, outside of a little bit higher amortization?

You hit one of it is that now there are -- during this quarter we had three full months of amortization related to Skilled Services, where we only had two months in the last quarter. And then secondly, there was about a couple hundred thousand dollars or so of extra depreciation related to these branch closures. Those are the two main things.

That will go away and this will -- I mean, I think the amortization is $250,000 or somewhere around that for the Skilled, so only a part of that would have been incremental in 3Q. So there should be the D&A going down in the fourth quarter?

The amortization on Skilled is a little bit higher than that. It is closer to $0.5 million. But you would expect a couple of hundred thousand dollar change all things being equal because of the onetime depreciation we had this quarter related to these branch closures.

Jeff Silber, BMO Capital Markets.

I am sorry to go back to this branch closures, but once you close these branches in Florida, roughly how many branches will you have in the state?

About 60 -- well, in our on demand division.

Exactly, that is what I'm focusing on. And then beyond the on demand division roughly how many do you have?

We will get that question to you here in a second.

[I will call back]. That will be fine. I know you're not giving official color on '08 yet, but based on current trends, do you think you will be opening branches in '08, consolidating branches? I'm just curious what your current thought process is.

Our goal is to clean everything up that we needed to heading into '08. I think we have taken a good shot at that. I think we are it within five to ten branches -- let's call it ten branches of what we want to operate in '08. Initial color right now is we're not real bullish on opening offices in '08.

That's fair. You mentioned some of the, I guess, support services or back office costs. Roughly what can we expect on an annual basis in terms of cost savings based on some of the moves you have made?

Are you talking specifically about the back office?

Yes, if you want to give me some color on some of the other moves that will be great too.

The biggest chunk is by far here in the branches. I don't know if we're ready to give anything on an annual basis going forward, because we're not all the way through our evaluation of that this year. I think we can probably give you more color on that on Analyst Day. But by far the biggest chunk of the SG&A cost is in the branches.

But directionally when the number of hours that we're billing out starts to decline, we also want to keep our corporate support services in line with that decline. That is mostly what our cutbacks have been is directionally making sure that that is correct. So it hasn't been any huge chunks. It has been smaller incremental steps.

You had mentioned earlier when talking about the level of cash you might be comfortable with, you're probably a little above that now, and hopefully you will continue to generate free cash flow going forward. But I was curious what the thought process might be in terms of your comfort with debt going forward?

I guess it would depend what it was for. We are not opposed to putting any debt on the balance sheet. It is going to be -- when we look at the use of cash that we have it is always a balance between evaluating the ROI on the stock repurchase, which is going to approximate the cost of capital, and then the risk-adjusted return on any acquisition. If we did take on some debt it would be an acquisition that came along that had a really good risk-adjusted ROI, and we would just take those one at a time as they came along.

Okay. That is fair enough. Thanks.

On that branch count, in addition to the on demand division number that I gave you, the skilled division is running 11, and the light industrial division is running 14.

Jim Janesky, Stifel Nicolaus.

Two questions. Are you still seeing strength in the commercial construction area, and can you give us an idea of how that market continues to grow, if it does?

I will comment on Florida first. We have talked about residential being a little bit of a bloodbath down there, and found some stabilization for us actually. And we feel real good about the runrate of residential construction in all of our business in the state of Florida over the last eight to twelve weeks. Feeling like that it is not declining further at least. It may not be growing yet like we mentioned, but it is not getting worse.

But along with that is the commercial. And in the state of Florida we haven't seen that get worse. It is growing and it has been good. I think it is one of the reasons that the acquisition of SSC as Skilled Services of those 11 branches, we have been able to get in and they haven't had a falloff. Their revenue has been very consistent with a year ago, even though during the acquisition period we gave it a haircut just to risk assess it, or risk base, like Derrek had mentioned, that we do on all the acquisitions. But on that one we thought there were some risk of losing some revenue and we didn't. So we're pleased about that.

Now if I move over to the other coast and talk about California, in general all industries are struggling down in California, the commercial and residential and manufacturing. It is just a mixed bag out there of what we are seeing, depending upon what state you are in.

Is California roughly the same size as Florida as a percentage of revenue these days?

No, it is about twice the size of Florida.

Shifting gears to the workers' compensation side, you folks have done a great job in controlling costs there and limiting the amount of claims. But this has been going on now for a couple of years, and oftentimes you get asked when do you think that this can come to an end? And you say, well, we think we are getting close, but then you turn around and you get better claims and you reverse some reserves from the year before. Are we getting towards the end there, or there still more that can be rolled out to other parts of the Company?

I guess it depends who you ask. The CFO thinks there is more there. Our operating team -- the bottom line here is our operating team has just done an outstanding job here to produce year-to-date this year about a 10% decline in claims with some of the declines that we've had previously. It is a great accomplishment.

Will we have a decline in claims over the next five years equal to what we have had in the past five years? No, I don't think so, but we're not done yet here. We continue to learn more. We experiment more. Our operating team continues to get more seasoned. Our safety specialists do. Our whole culture is growing in this area. I do think there is some more work to be done here.

When we look at the fourth quarter can we assume that what is incorporated into your gross margin range that you talked about is similar experiences in workers' compensation that you had in the third quarter?

Well I appreciate the question. We don't get into that level of discussion in the guidance. We set a range on gross margin, and there's a lot of dynamics in there. I'm not going to tell you what to assume. I'm just going to stick with our gross margin guidance as far as giving future commentary.

Mark Marcon, R. W. Baird.

Good job in terms of operating in a tough environment. Nobody likes to close branches, but you guys are obviously being quite disciplined here. So kudos from that perspective.

I am wondering if we take a look at the construction part of your business, is that still around 37% of the revenue?

It is running -- with everything loaded in, all brands, it is closer to 35, 36% for the Company.

It is Mark, by the way.

Oh, sorry, Mark.

No problem. So it is at 35 to 36%, and residential continues to trend down in certain markets -- commercial is trending down at this point.

Commercial has been -- overall has been fairly stable for us. It has continued to be stable. Steve mentioned some discussion about California. And when I'm giving you these percentages, by the way, I'm doing it on a TTM basis because of the seasonality in the business. But over the last four quarters the big picture is that commercial has been stable, but we've got our eye on California.

How much is CLP growing?

It has been running in double digits all year. We are to a point where it is -- the California economy, it is causing it, so it is not in double digits but it is still growing. So it is somewhere between zero and 10.

Do you feel like they are going to be okay if the commercial business continues to slow, or if the slowdown in California in commercial spreads?

Who knows how deep California will go and what the ultimate result will be there. But we are confident that CLP Skilled Services, the Florida thing, is fairly stable and they've got a great outlook there. Arizona is doing wonderful with our skilled division. And now we have penetrated Texas a little bit. So we're getting diverse enough that we're not loaded all in one state, as when we first bought them. That is helping a bit. To make a further projection about where California is going, it is just too early for us.

Then with regards to thinking about next year -- and just to make sure I understand it correctly, it sounds like you're probably not going to add any branches. And so when we think about SG&A there's going to be some savings from the branches that you close. On the flip side we will have our normal inflation rate in terms of just all your normal branch operating costs and your personnel and things like that. Is that a good way to think about it?

Directionally, yes. That is probably a pretty fair way to think about it. What next year will look like in further cost cuts will obviously be tied with some of the trends that we see in fourth quarter from a revenue perspective, and what we see in different geographic areas. And different geographic areas have different opportunities for branch consolidations. Those are more favorable to us than just a raw closing because we can keep the customers. And that will have some impact on how we can impact SG&A if we need to cut back further.

Just to be clear for the fourth quarter you're basically assuming same branch revenue growth that is somewhere in the 1.7% range with the impact from the closures being somewhere in that 2.5% range?

Something like that. I think same branch might be a little bit less than that. It is probably closer to what we averaged for the full Q3 quarter here, which was a little over a 1 point of growth.

It is dangerous to base your forecast just off of one month. You can see that, as I read off the monthly comps, that while we had acceleration through the quarter, the first month of the quarter, this quarter, same branch revenue growth was a bit lower than it was when we ended the quarter. So things can bounce around a bit. And we tend to look at that last ten weeks or so of the trend in establishing the projection going forward.

Michel Morin, Merrill Lynch.

I'm sorry, I don't want to dwell too much on California and commercial construction, but I just wanted to clarify, Steve, when you said the CLP is now between zero and 10%, is that on a year-to-date basis or is that for the quarter?

No, that is just our current runrate.

That is the current runrate. Okay. Am I correct in thinking that as of Q2 to you were running around closer to 20%?

That is probably a little bit high, but it was high -- it was close to that. Yes.

Then on the UK I am bit surprised --.

Keep in mind, one thing there too is they have a lot of young branches that produce a lot of same-store sales growth, and so you have to take that into account. That is not all just a falloff. That is maturing of offices somewhat too. And we haven't laid that out clear for you. But just be careful that we don't think that the trend has fallen off that much.

That is very helpful. Then regarding the UK I'm a bit surprised by the branch closures, because I think also on the last conference call you had talked about seeing 10% constant currency growth in the combined Canada/UK segments. I was wondering has there been a significant falloff specifically in the UK in the last few -- in the third quarter, or is it just kind of -- has anything changed more dramatically there, or what is going on there?

It is a combination of a couple of things. The branches that we closed weren't contributing to the growth that we were talking about. So that is a mixed bag there. And this next set of branches just needed to go. They were definitely on a watchlist all year. And since -- when the country was growing, these weren't. And now we have seen a turnover there and the UK economy is getting worse. We have seen a little bit of a struggle the last four to six weeks, and that worried us. And we just said, why are we going to carry branches that didn't perform well in Q2 when things were going, when things are headed back down? So that is why we jumped on that decision.

Just broadly speaking the closures that you do make, are they pretty much across the board losing money at this point? Or how should we think about the -- is it same-store sales being down very substantially? What are some of the key metrics that really forced your hand there?

Again, it is a mixed bag. The United Kingdom branches were all losing money. And then another two or three of these United States ones were, but a big bulk of these consolidations, especially Florida, were not losing money. It is an opportunity to consolidate. Especially when we were consolidating brands, we had branches that were within a mile of each other still. And when we went through the recession back in 2001 we ensured that we didn't have branches that are within a mile or two. And we kind of cleaned that up, and we closed 20% of our base back then.

But when we did this acquisition in 2004 with Spartan and Workforce, we didn't close any of the Workforce offices along with that acquisition. Everything was growing nicely and we had large branches right across the street or within a mile of each other. And we said, why close them? They're both producing great profits, everything is going nicely.

But over the last year things have changed. We have taken as much as a 30 to 40% revenue cut in two offices that are within a mile of each other. And all of a sudden it is like, you know what, it is time to do some consolidations here. And when you're not in that growing market, your facts change and your decision-making changes. They weren't -- although they are not losing money, it is a great opportunity for us to combine.

There is not as much SG&A savings on those 15 Florida offices as you might normally see because we're keeping some of the staff. We're taking two offices, combining them, we're giving up the rent and a little bit of headcount, but not all of it.

Then two very quick ones. First the buyback, is the plan still to complete that by year end?

When we first made the announcement it was, gosh, April timeframe. And we said we would do it within the next year. We didn't say by year end. I think we've got a couple of more quarters is what our intentions are.

Finally on workers' comp, are you seeing the decline kind of across the board in every segment? And I guess to put another way, is there any contribution -- are you gaining or lowering your cost as a result of mix shift? As CLP becomes more important is that helping you or is that hurting you? Thank you.

I can't say that there is no impact from mix shift. Where there might be a slight impact from mix shift is some of the reduction in the residential business that we have done. However, if you take a look at the regions that are really leading the way this year in reducing their accident rates, they are areas that have not been hit as hard with residential construction, that did not have as big of a mix -- the Midwest, Northeast, things like that.

Now we have made some more progress in Southern California, and a piece of that could be related to mix shift but it is not the main thing. It is waves of geographic areas outside of the high construction mix where the leaders are just doing a great job, and have matured their teams, and they're executing very well on safety.

Jeff Silber, BMO Capital Markets.

I know it is late. Just a couple of quick numbers questions. If you decide not to open any branches next year, what should we expect in terms of capital expenditures? What kind of a normalized runrate maybe as a percentage of revenues?

On average the CapEx for these branches -- now it is different by brand, but if you were to do an average -- and I'm doing some pretty heavy rounding here -- it is probably about $50,000 a branch.

And those cross all three brands in total on average?

Yes, that is a rough average. Mix can shift it a little bit, but for CLP even the average CapEx is $75,000. Labor Ready is a little bit underneath that. So it is not going to be material.

That's fine. And then in terms of stock-based compensation, what are the expectations for the fourth quarter?

It should run fairly close with this quarter. You're looking at stock comp for this year of $6.5 million to $7 million roughly in total.

Mark Marcon, Robert W. Baird.

Two additional questions. One is what are you seeing in terms of changes in competitive behavior, or how would you characterize the competitive environment now, particularly for on demand?

We have definitely seen a lot of closures. We have seen closures in our own brand, so it is not surprising. That is actually the good part. The stuff that is a little bit more difficult is they are lowering prices and putting margin pressure out there. And we saw these same behaviors happen in 2001. That folks would on that last gasp of air give the business away on their way out the door.

It also makes it difficult that we are not interested in buying any of those businesses because they pretty much destroy them on the way out the door. Lower the gross margins and ruin the service model and burn the temporary worker base out anyway. In general we have seen some havoc that out there in the same places that we're struggling. And the branch count is coming down I believe at a faster pace than our own branch count is coming down. That is probably all I can say. We don't have a quick finger on our pulse because the state is not easily rolled up quickly.

When we think about, exclusive of the impact in terms of workers' comp, when we think about pay bill spreads, we probably have another six months to a year to go in terms of -- until that kind of normalizes out, or how should we think about that?

You know, on the current trend we're not expecting a large pickup in the fourth quarter for sure. I do believe by the time we get to next summer, depending on again what goes on in California, we should be making better progress. And even when the federal minimum wage takes another step upward, we're better prepared for that. There were just a couple of large states, California in particular, that took some large increases along the way. And in the middle of a difficult economy to deal with, it is not the best time to be passing through increases to customers, or encouraging customers to hire more workers. I think that is why you're seeing the unemployment go up also down in California. It is all related.

Steve, are you seeing any areas that are solid or that are showing decent strength?

Yes, we are. The Midwest is doing quite well. We are seeing -- Arizona is on fire. Colorado is not doing bad. Washington has remained very strong and hasn't shown any signs of a hiccup. These are large states that are doing very well. And that Midwest struggled for so long for us, and we're very pleased there, but they're not high construction states either.

In terms of -- you mentioned Arizona, what is the impact of the changes in terms of immigration policy, like particularly in Arizona that got their own state regulations that supersede the federal regs and are stricter, have you seen any impact from that?

We really haven't yet. We're very well prepared because we have been the compliance leader for a long time, and we're prepared to deal with whatever new regulations are out there on reporting and homeland security laws, and whatever is coming at us there. So our own operations of going to tick away well. I believe it is upside to us because I don't believe all the small competitors are ready and prepared and can comply with the reporting requirements that are coming on board. So I'm looking for upside.

I would expect upside too. I was wondering if you had seen any of it in terms of that.

Not necessarily yet.

Okay.

I think the economy is just doing well in Arizona still. Even though it is a big housing state itself, it seems to be ticking right along.

At this time there are no further questions. I would like to turn the call back over to Steve Cooper for closing remarks.

Thank you. We appreciate you taking the time to be with us today. And we look forward to seeing some of you at our Analyst Day on November 14. Thank you.

Thank you for your participation in this conference. You may now disconnect. Good day.