TrueBlue Inc (TBI) 2008 Q2 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 2008 second quarter results which were announced today. If you have not received a copy of this announcement, please contact Theresa [Bergland] 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 CEO and President, Steve Cooper, and CFO, Derrek Gafford. They will be discussing TrueBlue's 2008 second quarter earnings results which were announced after market close today. Please note that our press release and the accompanying income statements, balance sheet, cash flow statement and financial assumptions are now available on our web site 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 are reasonable, actual results may be materially different. Additional information concerning factors which could cause results to differ materially is contained in the press release and in the company's filings with the Securities and Exchange Commission, including our most recent forms 10-Q and 10-K. I will now happened the call over to Steve Cooper.

Thank you, Stacey. Thank you for joining us this afternoon to discuss our second quarter results for 2008 and a recap of our strategic progress. Earlier today, we reported revenue increase 6% this quarter to $371 million which is in line with our expectations we set at the beginning of the quarter. Net income per share came in at $0.39 compared to $0.41 a year ago and ahead of our earlier high end expectation of $0.30. Holding revenue trends in line with the beginning of the quarter and implementing further cost cuts during the quarter enabled us to exceed our earlier expectations. In a few minutes, Derrek will review with you in detail the items that helped us exceed our net income per share expectations for the quarter.

Acquisitions completed during the last 12 months fueled our revenue growth during the quarter contributing an 18% increase in revenue while revenue in our organic operations declined by 12%. Derrek will provide a detailed breakdown for you on the components of the organic revenue decline but first I would like to discuss our revenue trends and then I will talk briefly about the progress we have made in executing our strategy to diversify our revenue stream and develop future growth platforms. The operating environment continues to be challenging and the economic conditions have surely had an impact on us again this quarter. As mentioned on our first quarter results call on April 16, we had maintained essentially flat same branch revenue growth for about a year. Our trends were stable during the first quarter up to the middle of March. During the last two weeks of March and the first two weeks of April we saw our same-branch revenue decline by about 8 to 10%, significantly off the trends we had been experiencing. From net trend change we estimated that organic revenue would decline in Q2 by about 12% including the closed branch impact. We reported today that organic revenue did ultimately decline by the estimated 12%. Although the revenue trend fall off back in March and April was steep, it appears we have a fairly stable sequential base of revenue from week to week at this point.

Over the past eight weeks our organic revenue decline had been about 15%. That is how we have our estimates for Q3. This 15% organic decline is primarily a 12% decline in same branch revenue and a 3% decline from closed branches. The step down in revenue trends over this past quarterly have been broad based across most geographies and industries served and does not correspond to any one customer or type of customer. Understanding that our customers have costs to control as their own demand and needs fluctuate is the primary driver of our business model. We are continuing to make investments in our people through more focused sales and customer service training. This training is focused on stronger relationship and development strategies with our customers to help them with their fluctuating needs. I believe our training programs are making a positive impact.

Our strategy to grow revenue and income includes broadening our niche approach to serving the blue collar labor markets in the following formats: First, serving the general labor needs with our 762 labor-ready branches. Second, serving the longer term needs in the light industrial market with our 73 combined spartan and PMI branches. Third, serving the skilled construction trades with 81 CLP resources branches. Fourth, serving the transportation markets with experienced truck drivers through our ten TLC drivers offices and, fifth, serving the aviation maintenance and manufacturing markets with experienced aviation mechanics through our PlaneTechs operation.

Strategic actions taken most recently include the following: In December 2007 we renamed our company to TrueBlue to clarify our niche approach to serving the needs of the labor markets and our growing company. Also in December of 200 we acquired PlaneTechs, a leading provider of aircraft maintenance staffing. We are pleased with their performance in the first two quarters of our ownership as our employees are stepping up to meet the high demand for aviation mechanics in the marketplace. Also in the first quarter of 2008 we acquired TLC, a recruiter and provider of truck drivers. TLC will be our platform to further penetrate the transportation market with experienced truck drivers for both dedicated and temporary positions. TLC operates out of ten offices mainly in the West Coast. Our strategy is to take this business nationwide. One method of expansion we are testing is to share office space and our current office of another brand. This will give us the opportunity to expand the TLC brand quickly without opening new locations and incurring additional lease expense or exposure. The demand for this service remains high and we are excited about the long-term demographic trends shaping this market niche.

During the second quarter we announced our acquisition of personnel management, or PMI, a light industry staffing company that added 43 branches mainly in the midwest. PMI has joined forces with our Spartan staffing brand to continue the growth of our light industrial platform which now represents a combined force of 73 branches in the southeast and midwest regions. The light industrial staffing segment in the U.S. is a $9 billion market and is projected to continue to grow at over 6% throughout the next decade. We are excited about our expanding footprint and leadership in the light industrial marketplace as we believe high oil prices and the weak U.S. dollar along with U.S. productivity enhancements could revitalize American manufacturing. One overlooked contributing factor to the boom and offshore manufacturing has been the relatively inexpensive shipping and transportation costs to get the finished goods back to these shores. However, with the rising price of fuel along with other increasing costs as these nations become more prosperous, offshoring is starting to lose the cost advantage. It has been reported the cost to transport a shipping container from Shanghai to New York has risen from about $3,000 to $8,000. And there have been anecdotal reports that U.S. companies that have products manufactured overseas are now switching to local manufacturers because of the rising costs. The expansion of our light industrial group is focused on they emerging opportunity.

We welcome the employees of all of these strategic investments into the TrueBlue family and we look forward to these exciting markets. We believe that our niche approach to branding and going to market will set us aside as the leading provider of blue collar staffing. The acquisitions over the past four years, starting with Spartan staffing in 2004 and CLP in 2005 up to these most recent acquisitions, have made a positive contribution to our revenue, EBITDA and cash flow and have produced excellent returns on invested capital all while providing the clarity we want in the marketplace which will provide great long-term growth in the years ahead. 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 and proved 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. Through these most recent acquisitions we have reduced our exposure to the construction markets from over 40% just three years ago to about 30% on an ongoing basis. The acquisitions have reduced our exposure from 100% of our revenue in the laboring brand to 66% of our annual revenue going forward. Reducing our exposure to construction and reducing our exposure to just one recruiting model will provide strength and protection for our investors through diversification.

Our main focus at this time centers on the integration and optimization of our current structure and each one of our current brands along with maintaining a focused approach to maintaining costs in line with revenue in these difficult times. Although there is uncertainty in the economy and the labor markets, we are optimistic about the long-term demand for both skilled and unskilled blue collar labor especially in the small to medium-sized business market which is where our services are most widely used. In closing, I want to mention that we will hold our annual analysts day again this year on November 19 at 11:30 a.m. in New York City. Further details will be announced later. At this time, I'm going to turn the call over to CFO, Derrek Gafford, for further details on our operating and finance usual trend and then we will open up the call for any questions

Thanks, Steve. Good afternoon. I would like to start off today by pointing out the key items that caused us to exceed our expectations for the quarter. Earnings per diluted share of $0.39 exceeded our expectations by about $0.09. This improvement was made up of three major items. First, we received an income tax benefit of $0.04 per diluted share. This benefit was primarily related to the favorable resolution of certain state income tax matters. In short, we were able to settle these liabilities with state tax authorities for less than the exposure we initially expected. Second, we earned an additional $0.04 by further reducing our operating expenses and, lastly, a combination of lower depreciation related to deferring branch maintenance projects to the back half of the year and stock repurchases this quarter added an additional $0.01 per diluted share. I will provide additional background on these items as we walk through the key operating and financial trends. Revenues if the Record quarter was 371 million which was within our expectation at 370 to 375 million including the acquisition of PMI. Represented growth over the same quarter a year ago of nearly 6%. Of the 6 percentage points of total revenue growth this quarter, 18 percentage points was from acquisitions completed in the last 12 months offset by a decline in organic revenue of 12 percentage points.

Let take a moment and review the components of this quarters organic revenue decline. Branches closed within the last 12 months decreased revenue by 3%. Same branch revenue decreased by 11%. Revenue from new branches opened in the last 12 months provided 1% of growth and other items contributed 1% of growth. I also want to highlight our monthly same branch revenue trends this quarter in comparison with the same period last year. April decreased by 8.2%, May decreased by 11.2%, and June decreased by 12.6%. While our same branch revenue has taken a step down this quarter as we expected, the weekly trends from the middle of May through the middle of July have been stable at about 12% decline. In our 8-K filing today we have included tables providing the detailed components of Q2 total revenue and monthly same branch revenue trends. We have also included an EBITDA table which provides additional perspective on our performance. We believe this information is beneficial for our investors and we will continue to include this information in the future. For the third quarter of 2008, we expect revenue in the range of 390 to 400 million. This represents growth from acquisitions of 16% and a decline in organic revenue of about 15% resulting in an increase in total sales for Q3 this year of about 1% compared to the same quarter last year.

Now we will discuss the trends in gross margin. Our gross margin for the quarter was 29.8%, which is what we expected with the purchase of PMI this quarter. Pay rates have been growing faster than bill rates for several quarter as a result of minimum wage increases, a lower mix of construction business, and a competitive pricing environment associated with the slowing economy. However, we have made substantial progress in improving our trends. Compared to Q2 last year, bill rates increased 2.7% and pay rates increased 3.4% resulting in a gap of 70 basis points which is an improvement from the gap of 140 basis points in Q1 this year. Our estimate for gross margin for Q3 of 2008 is 29.5 to 30%. Selling, general and administrative expense as a percentage of revenue was 22.8% this quarter which was less than our post PMI expectation of about 23.4%.

Due to the number of acquisitions over the last four quarters, I am going to give some key points that should be useful in understanding our results in this area. First, total SG&A was 84.6 million this quarter which is an increase of 2.7 million over the same quarter a year ago. Second, included in our SG&A this quarter is incremental SG&A from acquisitions of 6 million. This represents the ongoing operating expenses from acquisitions that were not in our Q2 2007 results. Excluding the incremental SG&A from acquisitions, SG&A would have been about 78.6 million this quarter which is about $3.3 million less than the same quarter last year, or put another way, we experienced a $3.3 million reduction in our operating expenses in core operations.

While we are taken additional actions this quarter to reduce our cost structure, our positive SG&A are due to the culmination of many decisions over the last two years which I would like to highlight. First off, our new branches. During the fall of to 2006 when we first saw signs of slowing demand we made the decision to drop our historical run rate of new branch openings from 50 to 22 branches in 2007. During 2008 we reduced our branch openings to a total of three. As many of you know, new branch openings put additional pressure on operating margin due to the prolonged revenue ramp up created when demand dropped during economic downturns. Second are branch closures. During 2007 we closed 58 locations and so far in 2008 we have closed 24. This is a routine monthly process for us focused on maximizing net income by closing underperforming branches or consolidating branches to reduce fixed costs. Third is head count. In addition to reducing head count associated with branch closures, we have also reduced head count in our existing branches. This is a structured process we monitor each payroll period and our operating team has done an outstanding job managing these costs. We have also reduced the number of multi-unit managers as well as head count in our back offices Fourth is a variety of operating expenses where we have cut the use, deferred the cost, or negotiated better pricing. Bottom line here is our process for managing costs is to make the decisions when they need to be made. Our approach is make frequent and timely adjustments versus deferring decisions and later announcing a large restructuring plan.

We believe our approach is consistent with our return on investment philosophy and managing the business to maximize return for shareholders. In regard to our expectation for the third quarter of 2008, we expect SG&A to be about 21.3 to 21.7% of revenue based on the revenue estimate provided today. When reviewing our net income results for the quarter compared to Q2 last year, please keep in mind interest income is 800,000 less primarily due to lower yields on invested cash. Also, included in depreciation and amortization this quarter is an additional 1 million of expense related to our acquisition activity. Our income tax rate for the quarter was 29.2% which was below our expectation of 36 to 36.5%. The lower income tax rate was primarily due to the state income tax matters I mentioned earlier. We expect our income tax rate for Q3 to be about 37% which is higher than our expectation for the first half of the year. The increase is related to certain nondeductible expenses that now have a proportionately larger impact due to lower pretax income in comparison with prior years. Diluted net income per share for the third quarter of 2008 is estimated to be $0.38 to $0.42 and is based on an estimated weighted average share count for the third quarter of 42.7 million. Our share projection includes all stock repurchases through July 15 this year but does not include any potential future purchases.

I will finish off here with some highlights on the cash flows and balance sheet. We finished the quarter with 66 million of cash. Year-to-date cash flow from operations declined by 8 million in comparison with the same period last year. The decrease was primarily due to timing differences associated with income tax payments, offset by a slower seasonal ramp up of accounts receivable associated with our organic revenue decline. We purchased 880,000 shares during the quarter for 11.5 million and 350,000 shares so far in Q3 this year for 4.5 million. This leaves 21.5 million available under our current repurchase operation. In regard to capital expenditures, we expect CapEx of about 5 million for Q3 this year. That's it for prepared remarks, we will now open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from T. C. Robillard. Please proceed.

Great. Thank you. Good afternoon, guys. Just the first question I had, and I apologize, I jumped on a little late to the call. Did you talk about any workers comp reversals in the quarter that may have benefited in the quarter?

No. We haven't talked about that in prepared comments. However, the work comp reversal for prior carriers this quarter was about 125 basis points of revenue.

Of revenue. And sorry, Derrek, can you refresh my memory. Is that the same direct impact to the gross margin as well?

Well, it certainly lowered work comp expense by 125 basis points. Probably the best way to answer this to make sure there's no misunderstanding, T. C. is work comp expense this quarter was 4.1% of revenue. Last year same quarter it was 5.1%. So work comp is a point lower partly because the reversal was slightly larger this quarter than the same quarter a year ago and also our run rate on our current year work comp expenses dropped a bit.

Okay. And then just secondly, again my apologies if you already covered this. Derrek, I caught some of this in your prepared remarks. With respect to third quarter revenue guidance, did you talk about at all how that breaks that organic portion that you are looking for for the quarter, kind of minus 15%, how that, is that just a similar kind of minus 3% or so for closed branches minus 12% or so for same branch?

Yes, that you about right. We give the revenue guidance, we break it out to organic and acquisition. We don't break it down into detailed components for organic, but the answer to your question, it is about 12% on the same branch side and about 3 points or so of, actually I take that back, T.C., it is about 15 points on organic. About 3 points of that is for closures and the rest is a mixture of same branch, new branch, mixture.

Okay. And I guess as you are looking at -- you made the comment that same branch has been pretty much since mid May to kind of mid July and kind of that minus 12% range. What do you think is going on there that is showing some stability? I mean is it anniversaring some issues or are you just seeing continued issues that is being offset by some synergies or some cross sales that you may be getting from the acquisitions? What do you think is kind of working that is keeping that in a fairly stable because that's a pretty descent time? Two months, that's, that seems to be pretty encouraging.

Well, it was a steep fall off from March 15ish to the middle of April and that was shocking. We disclosed that on the first quarter call. That was really manufacturing and transportation industries hitting a little harder. We have also seen our commercial construction markets take a little bit of a fall down. Your question is more about what's created the stable base. Seasonal ramp upstarted, no doubt. That's helped keep things solid. So it didn't keep falling forever, and that was good news for us. The period of time between March 15 and May 15 was a little bit disheartening but the seasonal ramp up in construction has held up a bit. I mentioned in my prepared remarks the 12% decline in same branch revenue that we kind of stabilize that is really a broad-based decline where we have spent about oh, a three, probably three, almost three or four quarters talking about new housing markets back in '06 through '07 then things somewhat stabilized. The trends didn't get worse after Q4, Q1 of '07, and they held up pretty good for about a year. This is just a broader economic slow down we are feeling now. It is not being led by worsening housing. Housing has not improved. I don't want to mislead you there but it is a little bit further decline in commercial construction and then warehousing, manufacturing declining a little bit that we believe is a little more broad based than just the construction right now.

Okay. Then just last one and I will jump back in the queue. PMI acquisition, did that, was that as expected neutral to earnings in the quarter or was that actually a little bit more of a drag than you were expecting?

No, it came in right about where we expected. The revenue was real close. I think we threw out a very round number because we had to close the deal with 20 million for the quarter and it was just real close to that and the earnings was just really neutral.

Is that supposed to be accretive in the second half? Can you refresh my memory?

There could be a little bit there. This first couple of years of owning this deal before we start expanding it will l be primarily through the amortization line. It is going to cash flow nicely for us, but the most revenue will be offset by the operating expenses and additional amortization.

Okay. Great. Thanks, guys.

Our next question comes from Clint Fendley. Please proceed.

Good afternoon, everyone. Steve I wondered if you could update us on the competitive environment what you are seeing with regard to pricing across the board here.

Thanks, Clint. It is not getting easier. We're definitely in the part of the cycle where there is a lot of closure. We closed a lot of units ourselves. Derrek disclosed here today, I think it was in our press release also that 28 units in 2008, we had 50 plus in 2007. So we have closed several of our own but we do see smaller competitors closing up offices also and retracting and their foot going forward. So, I think we are winning the game here. We are holding tight on pricing. We are not playing that game. We have seen it a couple cycles where that's not a game you win it in a long-term strategy. So if people want to die on that sword as they're going out of business let them, but we are not playing that game. Your real answer is yes it is more competitive right now. We can see it in our quotes and what's being accepted and rejected, the feedback from our sales teams out there. So, but it is not overwhelming I can tell you that. It is not feeling like it is out of control that's causing revenue to get worse but we are going to hold the line in our camp.

Given that we have seen the broader step down and slow down here in the last three months then, how does that affect how you might execute further store closures here from this point forward?

Well, we have really been focused the last 24 months. We saw this downturn start back in July of '06. At that point in time we knew that we were headed into a period of time that was familiar. We had been there before, and so as Derrek mentioned even here today, some of the very first steps we took is pull back on the openings. We had a theory of only home runs can be opened. So I think we only opened 20, 22 locations in '07, all performing quite well in comparison to the rest of the portfolio. Then in '08 we have only opened three, and so that was a good signal that we saw economic times worsening. The closing we jumped right on that also.

You get to this part of the cycle and actually go back the last 18 months. In any given market or town or where ever this branch was located, we live by the standard that when one of our customers or the group of customers that's using that branch decline to a point where the branch is approaching a state of not being profitable. It first goes on to a list we monitor as it is declining we have seen the customers fall off, we've seen the profitability start to fall off. We don't rely on there's another customer to save that branch. In this period of time out there we can't play that game. So we have kept our portfolio very clean, the end of '06, the end of '07 and now even in early '08. So we don't have a large portfolio of branches that are losing money. We stay right on top of that. Derrek talked about two things. One, making sure that our portfolio of losing branches is clean at all times and we are still not in part of the cycle where we are going to let our branches suffer because we believe it will be picked back up. There will come a time in the cycle where we will start investing again. One of the first investments we make is hang on to the open branches a little bit longer. We are not in that part of the cycle, Clint.

Thanks. That's helpful.

We keep it clean. The other thing that Derrek brought up was the head count in the branches that aren't on this list, just the ongoing branches, and we monitor that on an every two week basis really tightly.

That's helpful. Final question here. In your intro you mentioned some interesting dynamics going on in manufacturing. Have you seen any sign that there might be some type of help or pick up in your industrial units here?

Well, we are quite excited about the demographic of this shift that we believe will come. It is early. Oil prices have spiked hard, heavily the last couple of months. And it is anecdotal evidence. We do have some reports of this happening. But it is more of a shift I believe we will see over the next 12 to 18 months as people retool where they put their orders in and who increases. So we have seen evidence, we have heard a little bit from our customers, and we've seen the reports in the national news. We are believers in this demographic shift.

Okay. Thanks, Steve

Our next question comes from Michel Morin. Please proceed.

Hi. This is [David] (inaudible) for Michel. Just trying to understand the sort of the one-time costs from office closures in the second quarter. Can you give a little clarification on that?

There's not much to speak of as far as closure costs. If there are terminations costs that come with the branches that are significant enough, we will report that. Most of these branch closures were all on shorter term leases. There's a few CLP branches while we have shut them down for revenue purposes we are using them maybe as a recruiting center. We haven't canceled the lease there. There's nothing of significance to report as a one-time closure cost to report this quarter.

Okay. And what would the acquired businesses that were primarily responsible for the acceleration there in the acquired business revenues?

It is mostly the acquisition of PMI this quarter.

Okay. All right. And then you gave the (inaudible) gave the bill pay spread in the workers comp. Do you have the impact on gross margins from acquisitions or was that not that significant?

Yes, we have been fairly transparent on this as we have talked about the acquisitions. I don't think we mentioned this in our combined comments, but our gross margin this year will be about 2 points less than it was last year and that's primarily because of acquisitions. If you look at our 8-K we filed today you will see gross margin guidance of -- that's 2 points less than it would have been if we hadn't done the acquisitions. But also keep in mind these businesses run a lower SG&A percentage. So the SG&A is for the year will, we are running probably about 2.5% of revenue, 2.5 percentage points lower than we would have been without the acquisitions.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question comes from Jeff Silber. Please proceed.

Thanks so much. In your prepared remarks, I think it was Steve that had mentioned this, you talked about no real difference by geography or industry that the downturn was broad based, how about in your specific service lines are your labor ready branches as the organic decline as much as we are seeing in the CLP and Spartan branches or are there some differences there?

Yes, there have been big differences. Obviously labor already led into this which we have talked about the natural business cycle. Labor ready is the temporary of all temporaries operating on a daily basis with a lot of the workers and with a lot of customers. It definitely felt it first, the steepest declines and then starting last quarter we started feeling a little more with CLP and really that had a lot to do with commercial construction lagging residental construction and a little bit of a drop off with the commercial construction the last couple of quarters that CLP has started to feel it. The spartan numbers have held up strong with where they serve and out of those offices. 20 of them are new offices ramping up, still providing growth, still penetrating their markets and penetrating new accounts. There has been some stabilization over the last eight weeks to Spartan. They're still not growing at double digits, but still showing growth. Derrek just mentioned that PlaneTechs is holding up really nicely. That has been a winner for us and providing a quite a bit of growth, even more than expected when we bought them. So we are quite pleased with that. Does that help?

Yes, that is somewhat helpful. Thank you. Derrek I think you had talked about some potential deferrals of branch maintenance projects, let me say that ten times fast, going from second quarter into the second half. Can you give us some rough estimate what that is going to impact in terms of cost in the second half?

You can kind of see it in our depreciation number for the year, Jeff. We haven't changed it significantly on the 8-K, the 2008 assumptions page, but there's about 19 million of depreciation in for the year. We have been running about 4 million a quarter. So there is -- not all of that jump is branch maintenance expense. There's maybe a million dollars in the back half of the year and then the rest of that is from system roll outs, but I would call it roughly about a million dollars.

Okay. And I don't have the 8-K in front of me. Please forgive me. Do you have CapEx guidance for the year in there as well?

Yes. I will give it to you. It is 20 million that hasn't changed. That's where we had it before.

Okay. Great. One final question. Are there any other branch closures planned as of now for the rest of the year?

Well, that is a process, Jeff. That's, we keep the portfolio clean; however, there's branches that we are watching closely that as far as announcements, we are clean on our announcements and we have not worked through this complete cycle. So we hope that things stabilize to a point where we can at some point say yes we are going to ride these things out, but it is a process, no doubt, of watching this.

Okay. Fair enough. Thanks again for the color.

Our next question comes from David Feinberg. Please proceed.

Hi, gentlemen.

Hey David.

Two questions. One a little in the weeds. I was interested, you talked about broad based weakness, highlighted transportation, we also cover the trucking stocks and we have seen more stabilization in some of the leading indicators we look at as it relates to trucking and transportation. I was curious if you just thought it was the markets you were playing in or the regions or what was it a little more, any more color you can give on transportation weakness would be helpful.

Well, it hasn't been our largest fall off. I think just in general, it has a match a little bit where manufacturing is going. Goods aren't moving to construction sites and just in general indicator like that. It is not the weakest segment at all. I don't want to say it is even close to where construction has been and where manufacturing was a little bit.

Okay.

That's good news what you are reporting.

One of the other industries we look at we have seen increased in interest some M&A activity, particularly private to public transactions this year driven by fears over capital gains taxes or more accurately changes in the capital gains tax laws in '09 and beyond or potential changes. You guys have been net acquired now for quite some time. Are you seeing any renewed interest or despite the fact that the fundamentals of the business are weak, is there any renewed or increased interest in some of the private businesses to sell to you in '08 before the end of the year?

There's a little bit of talk about that capital gains tax but it is not driving more interest than the offset, I mean the pricing is going on in those businesses right now. It is proven by our last acquisition what we paid for PMI. Our price expectations right now are that we are only going to do deals that this economic downturn is priced in.

I guess to that, that is what I am trying to drive at. Looking at your monthly trends on the year-over-year basis, things have deteriorated pretty rapidly here. I am just trying to understand if that means that the M&A pipeline is dried up or if there's room for you to close more deals by year end.

Yes. It is a couple of sides to that, that answer there. Private sellers are more willing, from what we have seen, to hang on through the cycle and this fear over whether the capital gains tax will be there or not is less of a fear than their willingness to hang on. There aren't very many deals that are priced correctly at this part of the cycle. The pipeline is fairly slow. The other is our own interest in as we took on this strategic framework that I rolled out today in my comments and we have talked about that we broadened our range of motioned out today in my comments, we mentioned about that we broadened our reach and our method of running TrueBlue. It has changed a lot in the last 12 months and we knew that once we got into each of these initiatives that we have talked about here today that there would be a settling point for us to ensure that our support systems, our IT systems, our communication systems, the expectation setting process, that it all stabilizes and that we have a lot of success going forward. And we are in that period of time, optimization of current assets is really what we are calling it. Not only because of the downturn but because of the significant acquisitions we brought on. It is actually a good time for us. The pipeline is still being looked at, but most importantly our first obligation, our first priority is to optimize what we have currently purchased and what we are running.

Maybe one quick follow up then there. It is twice now on the call you have talked about systems and deferring some investment to the back half of the year. Should we expect a major capital upgrade, systems upgrade or is what you have in place sufficient to support the businesses that you brought on line?

There's a little of both. Most of our capital upgrade is in your core businesses not the ones we have purchased. We had a project under way for a couple of years now that is getting closer to roll out. Derrek talked a little bit about that. This increase in deappreciation that has been put in for the year as a whole captures the fact that part of that system will be turned on in the back half of the year. Then other components will be turned on in the first half of next year. So Derrek you can giver them your thoughts on 2009.

Sure. Yes. The spend rate or depreciation rate on those systems was incremental amount for '09 in comparison with what we will be expensing in '08 is roughly an additional $2 or$ 3 million of depreciation if you follow how our stepup is occurring in Q3 and Q4 of this year.

It is not an endless pipeline though. We have specific projects we are working on that have end dates that are on schedule, on budget and so it is all planned expenditures and it is going to increase the efficiencies we need. Ultimately we can roll these other acquisitions out of the system we are building. It is not the new acquisitions that is driving the bulk of this upgrade.

Okay. So that is helpful. In terms of projects they're focusing on legacy branding and bring some of the new acquisitions on to them over time.

Yes. We have built them in a way that can, we knew about the strategy of running more than one brand and it can be expanded down the road, but we needed to get the legacy system right first.

All right. Look forward to seeing the results. Thank you

At this time, we have no more questions. I would like to hand the call over to Steve Cooper for closing remarks.

Thank you. We appreciate you being with us today and taking interest on your company. We will update you as we go forward. Have a nice day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.