TrueBlue Inc (TBI) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to TrueBlue's conference call. Today's call is being recorded. Joining us today is TrueBlue's CEO, Steve Cooper, and CFO, Derrek Gafford. They will discuss TrueBlue's 2007 fourth quarter results, which were announced today. If you have not received a copy of this announcement, please contact [Teresa Berkland] 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.

Thank you.

Here with me today is TrueBlue's CEO and President, Steve Cooper, and CFO, Derrek Gafford. They will be discussing TrueBlue's 2007 fourth 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.TrueBlueInc.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 or refer to 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 & Exchange Commission, including our most recent Forms 10-Q and 10-K.

I'll now hand this call over to Steve Cooper.

Thank you, Stacey. And thank you, everyone for joining us this afternoon to discuss our fourth quarter operating results for 2007 and a recap of our strategic progress that we're making.

I'll be breaking my comments today into three sections. First, talking about the quarter and the financial impact that we had, two, the short-term impact that we're making with our strategic progress and what we're working on, and then address some of the longer term shifts that we had during the quarter on our long-term progress of our strategic plan.

Earlier today, we reported revenue increased 5% this quarter over the same quarter last year to $354 million. Net income for the quarter of $14 million declined 33% as compared to a year ago. This decline is primarily related to three things. First, half of this decline is related to the difference in the tax rate for the two quarters, which was driven primarily by onetime adjustments and credits. Without these tax matters, the decline in net income this quarter compared to the same quarter a year ago would have been 16%, which is equal to the decline in operating income we've experienced.

Second, the year-over-year increase in the wages we pay to our workers has increased more than the rates we charge our customers. This is primarily driven by the size and the volume of minimum wage increases at both the Federal and State levels during 2007, and by the mix of our higher margin construction work being replaced by slightly lower margin work.

And, third, we had extra costs during the quarter related to the closing of 27 branches as we scaled back our operations to meet the current demand levels.

Now, Derrek will discuss all three of these items in more depth during his comments today.

The operating environment continues to be challenging and the uncertainty of the economic conditions require us to make continual adjustments to our cost structure to maintain alignment with the demand we are seeing. I'm pleased that even in a challenging operating environment we are trending with basically flat, same branch revenue growth. This trend has held now for about nine months and we don't see signs of it improving during the first quarter of 2008.

We also estimate that we will lose about 2% to 3% of our revenue during 2008 related to the closing of 58 branches during 2007. The combination of basically no same branch revenue growth, along with the lost revenue of the branches closed over the last 12 months and only opening three new offices in 2008 will most likely result in a decline in revenue from our core operations in the first quarter of 2008.

We are a disciplined Company, and we will continue to use the flexibility of our business model to control costs and to scale our operations to meet the expected demand. In addition to the branch office closings, we have also reduced 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 demands 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're also continuing to focus on increased selling and marketing activities. These increased activities include 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 into industries that are showing growth and stronger demand for temporary help.

Over the past six quarters we have stated that we have seen a slowdown in revenue related to residential construction. We have not yet seen demand for these services pick-up. It has been 18 months since the decline in demand for residential construction staffing began. Over the past year we have also seen the decline in revenue from industry supporting construction, such as transportation and building supply manufacturers, among others.

As mentioned, over the past three quarters demand overall has been fairly stable, although this has been spotty on a geographical basis. It seems both the southeast and the southwest have been impacted the hardest so far, and the middle states have held stronger. At this point in time, we are seeing stability in almost all of our geographies and industry. We expect we will see spottier results on a geographic basis over the next few quarters as the economic conditions reach that and then begin to improve.

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's a big part of the value that we provide. We 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.

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 a same branch revenue growth and then reaccelerate the expansion plans in all of our brand.

I want to talk a little bit about our longer term strategy and some of the changes we've made this quarter. Our strategy to grow revenue and profits includes broadening our niche approach to serving the blue collar marketplace. Historically, we have served the on demand general labor needs of our customers very effectively. During 2004 and 2005 we expanded our approach of going to market by adding the brands of Spartan Staffing and CLP Resources. In May of 2007 we acquired skilled services in Florida and [tucked in the] CLP brand.

We are pleased with the performance of these acquisitions and the strategy of going to market with three separate lines of business. One, general labor under our Labor Ready brand, two, light industrial under our Spartan Staffing brand, and, three, skilled trades under our CLP Resources brand.

During the fourth quarter of 2007 we renamed our Company to TrueBlue to clarify our niche approach to branding and growing our Company. This renaming also protects and preserves the power of our Labor Ready brand which remains our longest, our largest, and strongest line of business. We did not want to risk confusing the marketplace of the powerful value proposition that the Labor Ready brand offers the blue collar market, as we continue to grow additional brands.

During the fourth quarter, we acquired PlaneTechs, a provider of aircraft maintenance staffing. We will run the PlaneTechs operation as part of our skilled trades group and continue using the PlaneTechs brand name to penetrate the aircraft mechanics field. The leadership and support of our skilled trades group will run CLP as our construction skilled trade brand and, now, we'll run the PlaneTechs brand as our skilled mechanics brand. As you can see, the skilled trades group of TrueBlue is coming together nicely.

We believe that this niche approach to branding and going to market will set us aside as the leading provider of blue collar staffing. These acquisitions over the past three years have made a positive contribution to both our revenue and net income growth, and they have produced excellent returns on invested capital, all while providing the clarity we want in the marketplace with our customers.

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 customers and worker relationships between all of our brands. We will continue to use this approach in a disciplined manner to ensure returns on invested capital continue well into the 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.

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

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

Revenue for the quarter was $354 million, which was above our estimated range of $345 million to $350 million, due to the acquisition of PlaneTechs in December. Without the acquisition of PlaneTechs revenue for the quarter would have been about $345 million. This results in organic revenue decline of about 0.7% this quarter in comparison with the same quarter a year ago.

Total revenue growth this quarter was comprised of the following components. Same branch revenue decreased by 0.2%, revenue from new branches provided 1.4% of growth, closed branches decreased revenue by 2.7%, the two acquisitions completed in 2007 provided 5.3% of growth, and other items, such as currency fluctuation, provided 0.8% of growth.

I know everyone is interested in the same branch revenue trends, so let's cover those. October increased by 0.7%, November increased by 0.6%, and December decreased by 1.6%. Please keep in mind that Christmas fell on a Tuesday this year versus a Monday in the prior year. Without the shift in the Christmas, December same branch revenue would have declined about 0.4%.

For the first quarter of 2008 we expect revenue in the range of $312 million to $317 million. This represents growth from acquisitions of about 10.5% and about a 2% decline in organic revenue, resulting in a total sales increase for the quarter of 8.5%. The decline in organic revenue is based on the assumption of flat same branch sales, offset by the impact of net branch closings, currency, and the Easter holiday moving into Q1 this year.

Let's shift gears a bit and talk about gross margin. Gross margin was 31.6% this quarter, which was in line with our estimate of 31.5% to 32%. There are two key trends impacting our gross margin performance this quarter in comparison with the same quarter of last year, that I want to address.

First, work comp as a percentage of revenue was 4.1%. Included in work comp this quarter was a reduction to prior period reserves of about 1.6% of revenue, which was higher than the reduction received same quarter a year ago of 1.3% of revenue.

During 2007 work related injuries were down in excess of 10%, which brings our five-year track record to a 50% reduction in accidents. We also continued to experience positive trends in reducing the cost of individual claims.

The second item I want to cover here on gross margin is that pay rates have been rising faster than bill rates throughout 2007 as a result of minimum wage increases and a competitive pricing environment associated with a slowing economy. For the fourth quarter of 2007 pay rates increased 3.7% and bill rates increased 1.4%, compared to the same quarter of last year. Our estimate for gross margin for Q1 of 2008 is 30.5%. Sales, general, and administrative expense as a percentage of revenue was 24.8% this quarter, which was about what we had expected.

We closed 27 branches in the fourth quarter of 2007, which is higher than the 16 we had estimated at the end of Q3. Related to the additional closings is $700,000 of closing costs related primarily to lease terminations. Of the 27 branch closings this quarter, 24 were Labor Ready branches, 2 were Spartan Staffing branches, and 1 CLP branch. From a geographic perspective, 12 were in the UK, 9 in Florida, and 6 in other locations across the U.S. This brings our total branch closings for the year to 58.

Based on our revenue estimate we expect SG&A for the first quarter of 2008 to be about 25.3% to 25.7% of revenue. Our ability to scale our operations to meet current economic conditions is a key strength of our business model, which we'll continue to leverage as needed in 2008.

Our income tax rate for the quarter was 38.2%, about 2 percentage points above our expectation due to certain state tax adjustments that we do not expect to reoccur. We expect our income tax rate for Q1 of 2008 to be about 36% to 36.5%.

In comparing net income in this quarter to the same quarter last year, I'd like to remind everyone of the $4.2 million tax benefit we received in fourth quarter of 2006. This benefit was related to the retroactive extension of the work opportunity tax credit and our ability to take a deduction on state net operating losses accumulated in prior years. This reduced our tax rate for the fourth quarter of 2006 to 22%.

Diluted net income per share for the first quarter of 2008 is estimated to be about $0.18 to $0.20, and it's based on an estimated weighted average share count for the first quarter of 43.8 million shares.

Before moving on to the balance sheet, I want to address the impact of PlaneTechs. We expect PlaneTechs to add an additional 20 basis points of operating margin to our future results, which we have incorporated into our first quarter estimate. While their gross margin is less than that of our [core] business, the SG&A costs are also less due to their single location business model.

I'll finish off here with some highlights on the balance sheet and cash flows. We finished the quarter with nearly $70 million of cash, and nearly $100 million of cash was produced by operations. Days sales outstanding increased to 35.5 days this quarter compared to 32 days in the same quarter a year ago. The increase is related to bringing on the full accounts receivable balance of PlaneTechs but only one month of their revenue for the quarter.

Our allocation of capital between strategic acquisitions and stock buyback will continue to follow the same disciplined ROI approach we've used in the past. The ROI on potential acquisitions must exceed our return on equity goal of 20%, otherwise excess capital will be invested in share buyback. During 2007 we allocated $77 million to acquisitions and $150 million to stock buyback. For the first quarter of 2008 we expect capital expenditures of approximately $8 million.

Our top priority is driving profits in our core operations, while driving same branch revenue is key we'll continue to diligently scale our operations to meet demand as we have in 2007. Our commitment to controlling workers compensation is at an all-time high, and we have proven methods of reducing this cost that we'll continue to leverage. And we'll also stay true to our ROI discipline in our decision making processes.

That's it for prepared remarks. We'll now open the call for questions.

(OPERATOR INSTRUCTIONS.)

Your first question will come from the line of Jim Janesky of Stifel Nicolaus.

Yes, thank you. Can you talk a little bit, at the Analyst Day I think that you had expected about a 1% increase in same store sales for the fourth quarter, same branch sales, that is; was that correct?

At the Analyst Day we had put up a chart that showed organic revenue growth of about 0.5%, so we didn't give any specific numbers on same branch revenue growth, but talked about organic growth being somewhere around a half a point or so.

Okay. So it came in roughly in line?

Yes, it actually came in a little bit lower.

Okay. When you -- when Steve talked in his prepared remarks about weakness in the core brands for the first quarter that could come in lower than the first quarter of 2007, yet when you look at your outlook obviously there are some brands growing. Is it fair to assume that it's both your acquisitions, you know, PlaneTechs and that are growing currently, and that it's really the Labor Ready and Spartan brands that are putting the most pressure on same branch revenues?

Well, it's, number one, the acquisitions are providing great growth for us, and as we look forward into 2008 the PlaneTechs opportunity that we closed in December is going to produce some great results for us. And when we first bought that business it was performing on a trailing 12-month basis, I think we had disclosed around $70 million, and it's definitely above that number now. It's -- it could be as much as $90 million in our current numbers that we're thinking for 2008 as a whole. So that's performing very well, Jim, PlaneTechs.

Across the other operations, they're all a little bit spotty. Florida is continuing to put pressure on all three brands. They're on a year-over-year basis still declining yet I've found some stability, if you know what I mean, on a sequential basis going forward. So we had thought that a year ago two, though, and I'll have to throw that warning out. But right now, if I had to look back over the last few months, we have found some stability in Florida, but it's still producing negative growth in all three brands.

Similarly, out in California, Labor Ready and CLP are under pressure there. And so if you exclude the two coasts for all brands, the three core brands, Spartan, CLP, and Labor Ready, they're somewhat responding the same way. Now, Spartan, CLP, and Labor Ready in the State of Texas are all doing very well, and many other mid states that they operate in. The bulk of Spartan's operations, though, are in Florida and Texas, and so they kind of offset each other.

But really my prepared remarks were it's a little bit spotty everywhere, all industries and all geographies, but it's all balancing out to produce about flat same store growth, which is where we've really been in the last nine months.

Okay. In the areas where you are growing, Steve, would you say that it's, you know, that the economies in those areas are better than the areas where, such as Florida and California, or would you say that your growth is attributed to market share gains through maybe some of your sales initiatives?

I think it's economic driven, Jim. I think if we look at the impact really that was started and came on by the residential housing market, I think it's following suit. And where construction was hit hardest, also other industries are following suit, so it's first follows that industry which is really geographically driven, where new housing construction was the strongest. It is filtering into other states, though, there's no doubt about that, that we are feeling it in other states. We just felt it the hardest in those states where the residential construction was the highest.

Okay. Thank you.

All right.

Your next question will be from the line of TC Robillard of Bank of America Securities.

Great. Thank you. Good afternoon, guys. I just wanted to dive down a little bit more into the margin pressure that you guys are seeing, particularly as I looked at the first quarter guidance. You know, if I just take a rough cut through it it looks like you guys should see a little bit of year-on-year margin pressure on the operating line. I'm just wondering how should we be thinking about that? Obviously, the PlaneTechs acquisition should be delivering a little bit better than kind of Corporate average, but is this still just a function of working through more branch closings, is this a function of just the bill rate/pay rate discrepancy that hasn't worked its way through for you guys? Just a little more color?

TC, could -- I heard you mention -- are you asking about operating margins, or --?

Yes, exactly, operating margins?

And so the question is is are we seeing pressure in the operating margin?

Well, if I run through your numbers real quick in terms of your guidance for the first quarter, it looks like you are looking for another year-on-year decline on the operating margin, albeit it not to the same degree we've seen over the last couple of quarters but still a decline. So I'm trying to just get a sense as to what's really driving that? I mean is this simply just an issue where you're still not able to get the full pass through of increased wages in terms of on the bill rate, or are there some other issues there that -- are you seeing a very dramatic fall-off on things like nonresidential construction which is higher margin business for you? I'm just trying to balance all of that out as to when we should start to see that margin stabilize on a year-on-year basis?

Well, two things. Keep in mind that the first quarter is by far on an operating margin perspective the most sensitive out of all of these. It's the quarter that we've got the least amount of revenue from a seasonal perspective, but we've still got the fixed costs. So like with many other industrial staffing companies there's quite a bit of sensitivity here in the first quarter.

You know, the revenue being down on an organic rate of 2%, that's putting some pressure here. The PlaneTechs acquisition is actually helping operating margin a little bit. From a growth margin perspective they're impacting our consolidated gross margin by about a full 1 percentage of revenue. Their SG&A, though, is less than ours by more than a full point of revenue, and there's a little bit of impact on the consolidated depreciation and amortization line that really gets us down to looking forward they're going to add about [20] basis points to operating margin.

So I'm not sure if that answers your question? When we talk about operating margin there's a lot in there. Maybe you're referring really more to gross profit?

No, no, I'm looking at the operating margin, and really I'm looking at it year-on-year, so it should eradicate any seasonality issues. But I mean I guess it sounds just more like a fact that with organic revenues down that's just going to pressure your fixed cost base a little bit more, which is why you guys are modeling for down year-on-year op margins; is that a fair synopsis?

That's the main thing.

Now, when -- I guess then as we look through the year, and I know you guys kind of do quarter-to-quarter guidance, but as we look through the year, should we be expecting organic pressure, organic revenue growth pressure throughout the year or is this just a function as we're kind of going through to the end of the year, or does PlaneTechs really start to tick up, do they have any seasonality in the second half that could offset some of the organic pressure you're seeing? I'm just trying to get a sense, because if you guys are going to have organic revenue pressure throughout the year, it's certainly going to be a big drag on your operating margin even with the acquisitions kind of offsetting that.

Yes, keep in mind here that when the minimum wage increases came on a year ago, the operating margins then gradually decreased throughout the year, so some of what we're seeing here in Q1 is a carryover of what we saw in Q3 and Q4, that these pay rates have gone up faster than the bill rate, so that's eating into it. It's not just the fact that same branch revenue is going to be a little bit lower, so that works itself out as we get into Q3 and Q4 a little bit. Obviously, we ought to maintain the levels we have today, don't let them slip further, but a lot of that gap started towards the end of the year.

And so, Steve, do you think you'll be able to fully close the gap as you get into the second half, or is it a situation where the comps get a little easier and you guys continue to chip away on the bill rate side?

Well, we want to keep chipping away at that. I, you know, we had a little bit of slippage between quarter three and quarter four, so we're all over that. But obviously when there's, the demand isn't high it's hard to get the bill rate increases that you want.

And then, as I mentioned in my prepared remarks, some of this has to do with shift, also, that the higher margin construction business has gone away and we've held same store sales flat, that means that we've actually shifted these workers somewhere, but they're shifting into lower margin work. And so although the top line might be flat in same branch revenue, we've lost 40 basis points in our gross margin on that like business. So it's a little bit lower margin work that's available for that next sell, if you know what I mean?

Yes. No, absolutely, and that's --

Those are some of the drivers of that. Does it work its way out all the way by Q3? No, but it does work its way out a little bit in the first couple quarters.

Okay. And then just off of that, can you give us an update or some more color on the non-res market as it pertains to you guys specifically? Anything you can add there?

On the commercial market?

Yes, the commercial construction?

Yes. It's -- the new commercial is holding up pretty good. Some of the remodel work has slowed down. I don't know if that's just investments they're holding off on, but new commercial continues to forge ahead pretty good for us, and that's kind across all the geographies and the various brands that we serve, so which I think is a solid thing. If the new can hold-up the remodels will come back, especially with these lower rates that we're seeing.

How would that break-down for you guys in terms of new versus remodels? Do you guys have more exposure to new?

Well, in our CLP brand we're mostly -- I don't think I have that -- hold on a second. It's about half and half on remodel and new in the commercial business.

Okay. Great. Thanks for all the details, guys. I appreciate it.

Okay.

Your next question will be from the line of Christina Woo of Morgan Stanley. Please proceed.

Thanks a lot. I seem to recall that when we've talked in the past during time of macro economic uncertainty or slow-down, workers comp claims tend to rise. I was wondering if you are expecting that given the current economic state?

You know, that's kind of a philosophy that carried through the last recession, that people noted that, but I think we really have to keep in mind the insurance industry was going through such a change during that period of time, state laws were changing, and other things were impacting the insurance markets at that period of time, and even for our own business we were scaling back our branch count during that recession of 2001, and for us to pull back and say did claim count really spike during the recession or not, honestly reflecting back it's hard to tell.

Looking in this current period of slow-down, we have not seen that yet. Now, but we have cleaned up a lot of things, too, as far as quality of claim control, safety issues, who we're dispatching, how we're measuring claims, and how we're attacking those situations. It looks different inside of our own Company today than it looked six years ago, five years ago.

As Derrek mentioned, our accident rates are down 50%, and the crew that's watching all those claims and diving on top of those situations daily, we're in a lot better shape than we were then. So our feeling is we're not going to see that. Now, is that a -- will states loosen laws and will there be a general trend out there, or not? I don't know, I've heard the same generalizations that you've heard, but all we can do is look at our own results and say we're prepared for this very well right now.

Okay. And so the gross margin assumption that you provided, for example, didn't assume any increase in claims, it just assumes that a lot of the safety measures you've got in place will continue to be in place; right?

That's right.

Okay.

We'll continue with the safety measures and then as actuaries build-in inflation it has increasing costs over time, but that's due to medical cost inflation, not claims count going up.

Okay. That's helpful. And one last thing, you've talked about keeping an eye out for other acquisitions. The PlaneTechs acquisition was a little bit of a surprise to me because it's a departure from your core business, so it sounds like it's doing incredibly well under your ownership. Do you think that -- would we be surprised at the types of acquisitions you're thinking about making or is it fairly consistent, you're continuing to look at skilled services and blue collar types of services?

Yes, we're definitely staying in the blue collar niche is what we're looking at, and we were trying to build-out a full spectrum of work across blue collar, so from general labor to specialized trades. And now that we have a Division that runs our construction specialized trades and one now that runs mechanics there's not a lot of expansion beyond that. So we have an Industrial Division that can handle transportation, warehousing, logistics. We've got our general labor crew that can handle all industries, the tough to fill jobs that have a high degree of sense of urgency, and we like the way -- running this three Divisional approach, it brings a lot of clarity to our own internal employees and to the customers.

As far as expanding beyond that right now, future acquisitions most likely will be tuck-in geographically to one of these three lines of business. Now, we have a pretty strong footprint in our Labor Ready brand, therefore, we're not out searching for or really have in our radar screen expanding by acquisition in our general Labor Ready brand.

Okay.

However, in our light -- in our mid skill, our light industrial we are, it's primarily a southeast based Company, running 32 offices, and we're running in five or six states, and we believe that we can take that service to all 50 states. And so there's a lot of up side for us in that Division over the -- as we expand and look for opportunities, especially geographic platforms within that niche.

Clear out on our skilled side, again, I've already mentioned this, but in our skilled trades group, we're very pleased with our construction skilled trades and CLP, but they're only in about 22 states and there are some expansion opportunities. Not a lot of acquisition opportunities, but more of a store opening when we see the economy good, that we can attack a lot more geographies through opening that niche.

And now this Mechanics Division, again in our skilled trades group. Derrek mentioned it's run out of one office, and they've got a great recruiting methodology, and it's going to keep costs low, and it's really become a great customer service model that we will be able to apply to all types of mechanics, not just planes, and we'll be able to grow that way.

So, no, I don't think we're going to shock you as far as where we're headed with this acquisition process.

Okay. And what was your branch count at the end of the year? I have 892, but just want to confirm that?

Yes, I think it was 894. Let me check here.

So did you open two branches in the fourth quarter?

Well, we acquired PlaneTechs.

Yes.

And then we opened one CLP branch.

One CLP. Okay, thanks so much.

Your next question will be from the line of Jeff Silber of BMO Capital Markets. Please proceed.

Great. Thanks so much. I want to go back to your Analyst Day, as well. If I remember correctly you had a slide up there that I think you called the year 2008 financial outlook, and I realize this isn't guidance. But just kind of checking your prepared remarks against some of the information you'd given us then, I noticed a couple changes. I just wanted to clarify if anything has changed from your perspective over the past few months.

Specifically, since you've ended up closing more branches than you thought, I'm assuming you're going to have a greater SG&A savings than you thought. I think you were looking for about $6 million in SG&A savings, should we be bumping that up for this year?

Yes, we've increased that to $8 million, and when we filed our 8-K this afternoon we attached a new assumption slide there, so versus going through all of those I'll refer you guys to that and then if there are questions that come up that pertain to that I'll just take the questions.

I'm glad that you told me that. You just saved me a lot of questions. But since I haven't looked at it yet, on the gross margin side, are you assuming since we still had a number of states that raised minimum wage rates effective January 1st, including California and Florida, and since, you know, kind of looking at about 30.5% gross margin in the first quarter, should we expect it to trend roughly along those lines, or do you think that'll pick-up toward the end of the year?

I think it'll be around that mark, Jeff. You know, the one thing about the minimum wage increase is this year's in comparison with last year is that they're not quite as stiff. I think about the average increase or so last year in the minimum wage was somewhere around 12%. It's probably about half of that, because a lot of these states that are coming around to anniversary, not all of them but a lot of them are just inflation only based minimum wage increases. So there'll still be some increases there but not to the extent and not to the magnitude of what they were last year.

Okay. Great. That's helpful. In terms of the extra branch closings that you did in the fourth quarter, I was a little bit surprised you closed a Spartan and a CLP branch -- was that part of the original 16 that you were going to close or were those part of the extras, and, if so, why?

Well, there were -- excuse me -- there were two of them that were Spartan locations and those two were in the State of Florida. They were branches that we had had for about a year. Each one of those branches had, while they had many customers had one or two significant customers that had -- their customer revenue had backed off. We thought it was just best to take those two down. The CLP closure was actually a consolidation move into, with a skilled services location. But those three were unique, they weren't ones that we talked about at the end of Q3.

Okay. Great. And then I don't know if you can give us any color on -- in terms of the same store trends for January, or at least what you have in January so far?

Well, it's real dangerous to get into January because the first three weeks have all got holiday movement in them, but when we talked about where we were setting our guidance for the first quarter, we're assuming basically flat, same branch revenue growth, and we haven't seen anything as we move through January that would cause us to change that.

Okay. Great. Appreciate the color.

Your next question will be from the line of Mark Marcon of Robert W. Baird.

Hey, it's Mark Marcon from R.W. Baird. Wondering with regards to plans in terms of branches, can you talk roughly speaking what you think you might end up doing in terms of over the course of this year, new branch openings and new branch closings?

Yes. Right now, we are -- we have on the schedule to open three offices, and they'll all be CLP offices in markets where we have customers that are needing service, and so they're kind of primed and ready to go. And we've actually opened one of those already and it's doing well. So, yes, three is not many compared to the goal that we want, is to be opening 5% of our base, but that's kind of what we have on target.

As far as additional closings go, you know, we really cleaned up in 2007 to the point that we thought was necessary, but as we've stated in our prepared remarks here a couple different times, we will keep our finger on this pulse, and depending on which direction our performance goes we'll make further adjustments if necessary, but we have taken all the steps that we felt needed through the end of December.

Great. And then can you remind us, what is the construction exposure now, do you think, roughly speaking, including some of the more closely aligned areas?

Yes, the construction exposure is about with total construction somewhere around 35% of the total mix. That's got on-demand, CLP in it, we've acquired skilled services -- that's a pretty good mark for us, 35% or so.

Okay. And then you mentioned that you've experienced some success in terms of shifting workers, can you tell us the areas where you're seeing a pick-up in demand in terms of for your core Labor Ready folks and is it some of the examples that you've given us in the past in terms of like California, or is there anything new in terms of initiatives that you're employing that are going to help as you roll it out across the branches?

So you're asking what's causing the pick-up or where?

No, how are you -- you mentioned in your prepared remarks, you know, obviously, that construction is soft, you're doing a good job in terms of shifting workers over to new areas where demand is good, and I was wondering if you could shed a little bit more color on that with regards to the areas where you're seeing a pick-up in demand, and if that's -- if there's anything that you can apply across the network that you're learning in terms of any sort of new learning's that are going to help you to be more effective in terms of managing through this construction downturn?

Right. Yes, so there's just a lot of philosophy out there and training that we're putting in place, and the -- it did all start down in Florida, because they were so construction focused and we have admitted that the selling down there wasn't taking place at the level it needed to because it was all about service, and the telephone was ringing like crazy for seven, eight, maybe even nine years straight as far as just get me workers, get me workers. And when you're in that type of service mode you're not focused externally.

It did take a few quarters to make the adjustments, get the training in place that we needed to start shipping or shifting workers into more service type situations, and there is need down in Florida for workers, and mostly in the services area, and as we've made those shifts, it worked. Now, every geography is different, every marketplace is different, and they haven't all had the same fall-off in construction that Florida did.

But in general we have more of a counselor type sales process that we've instilled across our operations and continue to instill further, and that is go in and find out from all customers what their needs are. And it's surprising the success that we're having. However, a lot of those jobs are inside jobs, they're manufacturing and they're warehousing and they're loading and unloading trucks, and with that comes slightly lower margins. And we've talked a little bit about that here today, that part of the fall-off in our operating margins has just been the shift of business out of higher gross margin construction work into other things.

But across the board we do have good communications internally and training programs to share best practices of how to attack multi industries and especially in these hot markets of Florida, Arizona, Nevada, and Southern California especially of how to focus on other industries and train your employees of what type of work and how to go about it, and using more than just the Dodge report to go find that next job.

So, yes, there are best practices, it's no silver bullets out there, it's just hard work.

And, Steve, can you shed a little bit of light in terms of what you were saying with regards to the increased competition that you're seeing from some of the other day labor providers? Is that across the board nationally or is that just in pockets?

Well, there's a couple types of things that are going on there that we're feeling. And one is in the heavily -- the areas like Florida, and we're also feeling it in California, where there are some other providers. The pricing pressure is pretty stiff, and we have felt a larger fall-off in gross margins in these areas, not just because of the shift of business mix that I mentioned but even on these jobs that are still available the competition is bidding down that work, there's no doubt about it.

Now, as far as competition from non-day labor, traditional non-day labor providers, there's a lot of shift in people saying I want to get into more transactional work. They're seeing the same thing that we're seeing, that this is a pretty neat place to be. If you have a process in place that you know how to place five workers at a time, here, there, and the other place, that's a pretty neat process.

And so even some of the larger providers that have historically worked off of lower margins because they're putting 50 to 400 workers in a warehouse, they like the attractive, what they call "higher margins," even though it's a little bit lower margins for us, it's higher margins for them, and there is a little bit of a [race] in this tougher economic time right now to that space. I'm talking about the 18% to 20% gross margin work that's available out there, that it takes more transactional work to produce it than if you're running the entire warehouse, but it takes a lot less transactional work than our traditional day labor business takes, also. So that competition is stiffening up pretty good, Mark.

Are they able to duplicate your speed and rapidity in terms of filling orders?

Absolutely not, it just doesn't happen. They don't have access to the workers that we have, and so I think we're winning in that space as long as we're willing to pick-up our long-term customer service needs. So we have a business process that's built around dispatch, checking on the daily customer service needs, but we're having to retrain or focus training on long-term customer needs, and that's what some of these others do better than we have traditionally done.

And so we have our things that we need to improve on, but one thing we do have is access to the workers, so that's going to give us that leading edge as long as we can increase our customer service to the level that we know we need to.

Okay. Great. Thank you.

Your next question will be from the line of Mark Carney of Coker & Palmer.

Good afternoon.

Mark, how are you doing?

Good. Let me just clarify a few things. Derrek, on the pay rate and the bill rate, was that 3.2% and 1.7%?

It was bill rates of 1.4% and pay rates of 3.7%.

Okay. Thank you. And --

Still there, Mike? Is the Operator there?

Your line is open.

Hello?

Yes, we're still here.

Can you hear me?

Yes, I can hear you, Mike.

Okay. They cut me off. They always like to do that.

Oh, sorry about that.

After one question even, huh?

I know. Well, you know, they know me well. Anyway, the -- is the pay rates lower because the mix is lower essentially, because the minimum wage increases should be more than that?

Ask me that, again, one more time, Mike?

The pay rates, the 3.7% seemed low relative to the minimum wage increases. Is that a mix shift situation?

Well, it's -- you know, Steve talked about this a little bit, it's -- we've talked about two of the main factors here being, yes, there is upward pressure on pay rates throughout the year because of minimum wage and, yes, there has been downward pressure on bill rates from competition, but there's a lot of mix issues here, as well. So from the types of jobs that people are going out on, the mix changes between states, so this bill and pay rate, it's a bottom line on what's going on with margins but there are a lot of factors there besides just minimum wage.

Okay. I got that. And then at the first, I thought you had mentioned that the guidance for the first quarter was expecting negative 2% growth organically; was I wrong on that?

No, that's right, because that's with the loss of the closed stores. Same revenue of being close to flat, but then losing 2% to 3% of revenue from the stores we closed over the last 12 months.

Okay. Well, to that point, just for January, not that it's very substantial for the full year, but I remember for several years it just -- January kept being strangely robust, and then last year was the first year that it was down significantly, and now you say it's somewhere near flat. Is that, I mean is there anything specific to January that you're accounting for given the past trends, or --?

No, we wish it was strangely robust this year, but I mean we were running relatively flat comps through most of the fourth quarter, that's really where the trend has been. There hasn't been anything that has really shifted significantly in January, Mike, or else we'd wrap that into part of the guidance.

Okay. Then, lastly, on the -- on D&A, that's just all of sudden picked up significantly. What's the amortization on PlaneTechs?

Oh, it's a little over $600,000 a year, or $600,000 a quarter, excuse me.

Okay. So $2.5 million, so that's a --

Hold on a second.

Hang on a second, Mike.

No, that's what it was for the month. Let me give you the quarter.

$2.4 million.

Yes, quarterly the -- that's right -- quarterly --

Well, it can't be monthly, I hope.

Quarterly it's about $600,000.

Yes. So that makes it still accretive in this year, I guess by a little bit?

Yes, for the fourth quarter 2007 -- yes, it looks like -- it was slightly accretive.

No, I'm sorry, what is the annual expected amortization? Is it $2.5 million or that $600,000 was just in the fourth quarter?

No, it's about -- the annual is about $2.5 million.

Okay. So in the first quarter it should be about $600,000?

That's right.

And in the fourth quarter it was less than that?

That's right, about -- yes, a couple hundred thousand.

Okay. What's the difference between what you've been running in D&A and then plus cleared a little bit from skilled and from PlaneTechs, what's the difference there?

Are you asking for depreciation, D&A for the whole year?

Yes. I see it's $17 million, so.

Got it. You're looking at the assumption slide. The change is towards the back half of the year, we've got some technology that we're rolling out and some new depreciation will come on during the back half of the year.

Okay. So it's just a function of the capex that's going to significantly materially change it?

Yes.

And then one other thing, just to clarify, in the first quarter was the SG&A expense that you had mentioned 25.3% to 25.7% of revenue?

Yes, 25.3% to 25.7%.

Okay. And so D&A would be less -- you're assuming less than $4 million in the quarter?

Yes, that's correct.

Okay. All right. Thank you very much.

Your next question will be from the line of Clinton Fendley of Davenport. Please proceed.

Thank you. Steve, on the store closures, again, I'm wondering at what point here do you begin to cut into the muscle here as you think about an eventual recovery?

Well, right now we're just -- we're going to hold things flat, and if trends don't change we're not going to cut deeper into that muscle. If things fell off, and whether it was geographically or spotty across all geographies, you know, obviously we have to pay attention to what's going on with California. We haven't had a lot of store closings in California, but we run awfully large branches there, also. And so to think that we can rush to a massive store closing opportunity or any, any really, things have to fall off quite a ways for us to think that that's the opportunity.

So, at this point in time, it's all about sell, sell, sell, customer service, and hang tough with as many cost controls as we can put in place besides closing offices. And we want to hang on to our competitive edge. We have a strong hold in the State of California that we don't want to give up on, and without stronger signs that we need to cut deeper, we're not going to.

Are you seeing any of your regional or smaller competitors here coping in a similar manner by closing stores?

Well, you know, it's such a fragmented business that it's hard for us to get a good handle upon that, but we do see many store closings here and there in all of our brands, to tell you the truth, that other competitors have faced what we've faced. But right now, again, we're going to stay focused on high customer service and trying to migrate these workers around to various industries that are growing and paying attention to that first, and then other cost controls that we can, like controlling the headcount, having some of our hourly people work on a more part-time basis if things get worst, first, and measures like that first.

I guess, obviously, we're 18 months now into sort of the downturn. I mean if it goes on for an extended period of time here, I mean how much longer before you begin to see some of these smaller competitors go away?

Gosh, that's just too tough a question for me to answer. I don't have insight into their operations and what they're facing, but we do have plenty of proof that smaller competitors are closing offices, and I would say across the board the amount of closings that we've done as a percentage match what we see out there in small competitors, but it's hard for us to round that up very quickly because the information is not quickly available of who these competitors are because it's so fragmented.

Right, understood.

Our intelligence comes from a pretty slow process of looking at business records and understanding, and that could be trailing three to six months before we understand what's going on out there with our competitors.

Understood. Thank you. That's helpful.

Okay.

Your next question will be from the line of Michel Morin of Merrill Lynch.

Yes, hi, guys.

Hi, Michel.

Hi, Michel.

It looks like we lost Michel for a moment. Is the Operator there?

Yes. Michel, your line is open.

Can you hear me?

Got you now.

Okay. Sorry. I just want to go back to the same store sales for the first quarter, and I know you've addressed this already, but if I go back to where we were a year ago at this time on the conference call, the first few weeks of January were down 6% to 8%. You ended up down 6.6% in January and then had a major recovery in February and March. So help me understand a little bit how if you're flat right now or what you're assuming is that you will be flat for the quarter, are you assuming there's going to be a similar pick-up to what we saw last year?

No, because we don't have that big fall off this year like we had last year, as far as year-over-year revenue growth. As Derrek mentioned earlier, the trends through January feel a lot like the fourth quarter trend, and so at this point in time if they maintain through the first quarter we can match the guidance that we put out which looks a lot like the fourth quarter numbers.

Okay. All right. And then on the gross profit margin assumption for the first quarter you're -- presumably you're not assuming any workers comp reversals, or are you?

Well, keep in mind that on the, number one, the gross margin forecast that we're giving has got PlaneTechs in there, that's dropping it down.

Right.

Number two, we don't give -- we give quite a bit of commentary here, more than most companies, on specific line items of the P&L to give everybody a range, but we're not going to drop down into worker wage percentage and payroll tax and work comp. We're giving you our best really forecast of all the factors in gross margin and throwing a gross margin percentage out there and really that's as detailed as we're going to get.

Okay. And then, finally, PlaneTechs, Steve, you alluded to the growth rates that you're seeing. That sounds phenomenal. Would you mind, could you give us a bit more color in terms of what's driving that, kind of the sustainability of that kind of growth looking out beyond, even beyond the next few quarters? And, also, if there's any seasonality that we should be aware of? Thank you.

Yes, that's a great question. We're not anticipating any seasonality with this business. Holiday impacts a little bit, but when we get into December, but not because of weather. These are inside jobs and a lot of them -- well, I'll just put it this way, the pick-up is new customers, and it's further penetration of a little bit of existing customers but we've had a lot of success in picking up new customers in this PlaneTechs business. Some of it was well underway when we were in the middle of due diligence, which gave us the excitement because we were buying this trailing 12-month business, so we could see the momentum that it gathered in its business, and to see that it really held true for the first two months of operations is exciting for us.

But these are new customers served, and the recruiting efforts behind it are solid, and it's sustainable to the event that this industry is in need of mechanics and so it's a recruiting game for us. The open orders in our PlaneTechs business are huge, so as fast as we can recruit and put better process and the resources there, I believe we can fill these orders and can continue to outperform what we bought.

Great. Thanks very much.

Your next question is a follow-up from the line of Jeff Silber of BMO Capital Markets.

Hi, just a real quick numbers question, within your guidance what are you looking for for stock based comp? And if you can also tell us in terms of the outlook for the year, as well, that'd be great?

The stock based comp expense, yes, I have to be a little careful here, Jeff, because we're not giving annual guidance, but for the first quarter of 2008 it's probably going to be a couple $100,000 or so above where it was last year, and I mean I think that's a safe assumption to use.

And should that be trending down throughout the year like we've seen in the past couple of years?

You know, you should see a pretty stable trend here. What happens with our stock comp by quarter is the first quarter is a little heavy for us dollar wise, and then it's fairly evenly distributed to the last three quarters, and that type of a trend will be the same, but first quarter will be a couple $100,000 higher.

Higher than last year?

Yes, because really what you've got with the stock comp is, you know, we've got three and four-year vesting, and so there's still a little bit of layering that comes on in 2008 as far as expense and then we're fully loaded.

Okay. Thanks, again.

And we have no more questions in queue. I will now turn it back to our Chief Executive Officer, Mr. Steve Cooper, for closing remarks.

Well, thank you for being with us today and your continued interest in TrueBlue. We're excited about the opportunities that we face ahead, but the opportunities that we have continue to expand, the platforms that we've built and, more importantly, to continue to expand the profits in our core operations which, as we've mentioned here today is our number one priority, to continue to focus on those same branches, and watching the pulse of the economic conditions that we face will be right on the bright spot of what we do, and scaling our operations is right there. So thanks for being with us today, and we'll talk to you at the end of the first quarter.

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