TrueBlue Inc (TBI) 2009 Q3 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 2009 third-quarter results which were announced today.

If you have not received a copy of this announcement, please contact [Theresa Birkeland] 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 2009 third-quarter earnings results which were announced after market close today.

Please note that our press release and the accompanying income statement, balance sheet, cash flow statement and financial assumptions 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 would cause results to differ materially is contained in the press release and in the Company's filings with the Securities and Exchange Commission, including our most recent forms 10-Q and 10-K. I will now hand this call over to Steve Cooper.

Thank you for joining us today to discuss our third-quarter results and our outlook for the fourth quarter of 2009. Today we reported net income of just over $8 million or $0.19 per share for the third-quarter on revenue of $285 million. Our net income per share was $0.06 better than our expectations.

This was primarily driven by our revenue beating our expectations by $13 million. Our better than expected revenue was a result of stable same branch revenue along with one large customer using more of our services than have been expected.

We had mentioned the impact of this one large customer at the end of our second quarter and had projected the Q3 impact to be approximately the same as Q2. However, the impact of this large project was about $10 million greater than expected, thus driving our better-than-expected results on both the top and bottom line.

We had no significant geographic impact that was materially worse or better than our average revenue declines. And as for the industries served, we have seen our manufacturing and distribution business improve ahead of the construction sectors that we serve.

2009 started with the largest drop-off in demand in the history of the staffing industry. Our response to the significant drop in our revenue at the beginning of 2009 was to reduce operating costs across all of areas of the Company.

As a result, both our second and third quarter had SG&A expenses of over $20 million lower as compared to those periods during 2008. As you can see from our Q4 guidance today, we have projected our SG&A expenses for 2009 will be over $70 million lower as compared to 2008.

These costs were primarily reduced in three areas as compared to a year ago. First, we reduced our branch count by 155 branches or 17%. Second, we reduced our employee count from just over 3300 to less than 2600, a 22% reduction. Third, there have been across-the-board cutbacks in all support and administrative costs of 30% as compared to a year ago.

Most of these cuts were all made by the end of the first quarter and are now reflected in our run rate which will give you a good sense of the impact going forward. The combination of these well-executed tactics of cutting costs and stabilizing revenue trends has shown the power of our business model which is all about the amount of the bottom-line leverage when we get any top line pickup in revenue. When revenue ramps up on a per office basis and we hold costs in line, we do experience strong bottom line improvement with each additional dollar of revenue.

We will continue to manage our business with tremendous discipline which will drive this leverage as business continues to improve. And just as we experienced operating leverage after the last recession, we are confident we would experience this during the anticipated recovery.

We believe we would once again be the first to see it and enjoy that strong bottom-line impact with any slight tickup on the top line, as proven by the large project we are currently serving. The incremental profit from incremental revenue is about 20% of revenue.

We believe that our niche approach to going to market with five distinct brands has set us aside as the leading provider of blue collar staffing in the United States. While the business conditions have been difficult in most all staffing sectors, we remain extremely positive about the opportunities in the blue collar sector as the recovery takes hold. We believe we are well equipped to serve these markets and customers and we believe our customers will be the first to grow with an improving economy.

We have the ability to quickly expand our regional truck driver and light industrial staffing brands when we see the opportunity, as we can move these brands into our network of existing offices around the country. We have already done this in selected markets and we are confident in our ability to move quickly when we see the opportunity to serve customers with these brands in new markets.

We also now have the ability to recruit skilled workers nationally without adding new branch offices. This centralized recruiting process and technology was part of an acquisition completed. With the work we have done, we are now confident we can use a centralized recruiting process that allows us to serve customers where we do not need actual branches.

This can be done for position (inaudible) for mechanics to drivers to several other skilled trades positions. We now serve customers and workers beyond our traditional model using branch office locations.

This will keep our expansion investments and operating costs low as we have the opportunity to expand our services. Our team continues to track the projects included in the economic stimulus plan. The bulk of this stimulus money has yet to be released and it appears at this point, most of these projects will not even start until early 2010.

We continued to be prepared and well suited to provide labor quickly for each project. We believe with the relationships we have in place and our approach to placing both general labor out of a national network of branch locations along with recruiting and placing skilled workers nationally without regard to having branch offices nearby will provide us several opportunities to serve our customers as they ramp up their businesses to take on these projects.

We have consulted with many of our customers that have the ability to participate in these projects. And they have built valuable -- we have built valuable relationships with them by helping them grow their businesses as they understand our capabilities.

Although 2009 has seen extreme economic conditions, we are proud of our response and our many employees that have each done their part in making us a stronger Company. We are prepared to prosper in a recovery.

At this time, I will turn the call over to Derrick Gafford, our CFO, for further analysis of our operating trends.

Thanks, Steve. Good afternoon and thank you for joining us.

I will provide some supporting background on Steve's commentary, starting with revenue. Total revenue this quarter declined by nearly 27% in comparison with Q3 last year. This decline is entirely related to organic revenue as we have not performed any acquisitions over the last four quarters.

Please keep in mind when looking at our overall revenue decline of 27% that 9 percentage points of the decline is related to branches we decided to close over the last 12 months as a part of our cost management plans. As most of you know, our business is seasonal with the third quarter being our biggest due to the larger proportion of outside work projects.

Our seasonal revenue ramped up this quarter as we expected and we also experienced an additional $10 million of revenue for our quarterly run rate from one large customer. These revenue dynamics produced improvements in our year-over-year same-branch revenue trends as June declined at 24% and September declined at 18%.

Backing out the year-over-year growth impact of a large customer, same-branch revenue would have been negative 31% in June and negative 26% in September. For the fourth quarter, we expect revenue in the range of $240 million to $250 million which is a decline over Q4 last year of nearly 20%. We expect net income per diluted share for Q4 2009 to be $0.00 to $0.05. Now let me provide some background on gross margin.

Our gross margin for the quarter was 29% which was about what we expected but lower than the 29.7% we reported same quarter a year ago. The 70 basis point decrease was driven by mix as our lower gross margin brands have become a larger component of total Company revenue.

Excluding the impact of this mix, there are two other items in our year-over-year gross margin trends this quarter that are offsetting each other that are important to point out. First, our gross margin is increasing from lower workers compensation expenses as we continued to lower the rate of injuries in our business.

Second, gross margin is decreasing due to more large customer business as well as an overall competitive pricing environment. Looking to Q4 2009, we expect gross margin of about 28%.

Our Q4 gross margin estimate includes our usual seasonal change along with a more pronounced shift in both industry mix and larger orders which have slightly lower gross margins. Let me add some comments on sales, general and administrative expense.

Our team continues to do an outstanding job in balancing the priority of serving our customers while making smart cost management decisions to improve efficiencies. In response to declining revenue, SG&A expense this quarter was reduced by 25% in comparison with the same quarter a year ago which nearly matched this quarter's year-over-year decline in revenue of 27%.

As Steve mentioned earlier, these reductions were the result of aggressive cost management decisions across all areas of the Company. In regard to our expectation for the fourth quarter of 2009, we expect SG&A to be about 26% of revenue based on the revenue estimate provided today. This will bring our total SG&A reduction for fiscal year 2009 to over $70 million in comparison with 2008 which is in excess of a 20% reduction.

Before wrapping up, let me touch on liquidity. We made some great strides in improving our liquidity over the last quarter. Our liquidity, which we define as cash plus borrowing availability, improved by about $25 million in comparison with Q2 this year, bringing our total liquidity to about $160 million.

The increase in liquidity was due to a $35 million reduction this quarter to our letters of credit previously held by work comp insurance carriers. While our cash dropped to $95 million this quarter versus $104 million in Q2 this year, this drop was due to a $20 million increase in Accounts Receivable associated with our seasonal revenue increase.

Day sales outstanding increased to 41 days this quarter due to an increase in mix towards larger customers. Eliminating the change in mix produces a DSO comparable with the same quarter a year ago.

Let me wrap up with two points. First, we have one of the best balance sheets in the industry with no debt, $160 million of available liquidity, 80% of our work comp collateral backed by restricted cash and profitable year-to-date operations.

We have the balance sheet and discipline know-how to weather any challenges that might be left in this recovering economy. Second, we are well positioned to deliver strong results as the economy improves due to the operating leverage in our business model. While our year-to-date operating income is about 1% of revenue, incremental operating income on additional same-branch revenue is 22 to 24%.

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

(Operator Instructions) Clint Fendley.

On the single project customer, with the additional $10 million here, are we approaching a level at which you guys might break out a bit more detail on this customer?

I don't think so because it's not going to be a long-term situation and for competitive purposes, we need to keep it confidential. I think the results that we have shown here today in talking about at least what the incremental value was on the top line at least provides you with some understanding of what it has done for us in Q2 and Q3.

The project is still being serviced and it has gone on longer than we had obviously first projected but we are happy about that. That shows our great service and the ability to recruit the right people and with the right skill sets to provide this customer a chance to finish a project that they are on.

And how are you thinking about the duration of the contract from today forward?

It's getting closer to winding down than building up but we said that at the end of the second quarter too. But it's probably closer to reality that by the end of the year most of this will be -- will wind down.

How much is in the revenue assumptions then for next quarter from this customer?

We haven't broken that out exactly but the revenue projection that we gave today has in it our estimate of what the wind-down will be of this customer.

I guess stepping back for a minute, guys, on the -- as we look at the big picture and think about even the commercial real estate market, any thoughts on just how a prolonged weakness in that area might affect you guys going forward?

Well we have reduced our cost structure to take that into account already, Clint. Although we don't see commercial real estate bouncing and providing a great growth avenue during 2010 and it's not really what we're planning our business around, further reductions, because this sector has already been reduced so far, won't be material to our current trends. It's just not going to be a growth opportunity for us in this short period of time.

And I may have missed it in the filing here, but the pay rate versus the bill rate changes for the quarter.

We're just not getting into bill and pay rate discussions very much anymore because the dynamics of our business has changed and it's just a little bit misleading and here is why. We used to talk bill rate, we used to talk pay rate.

But as we have taken on more skilled business, there's this component in our gross margin that's per diems which runs through bill rate and does not run through the pay rate. So what we have got going on in our results right now if you break this all down is that year-over-year, we are experiencing overall about maybe one percentage point or so of pressure on gross margins just because of some different industries that we are serving in each of the brands, larger customers.

All of this builds into bill and pay rates and so forth. And that's being largely offset by lower workers compensation costs. So that's really what the two dynamics that are offsetting each other are that I was trying to describe in my script.

That's very helpful, Derrek. Final question, I guess any better insight from today on the stimulus and the benefit that might have for you guys?

It's been surprising to us at how slow it's been released. There are a few projects that are ramping up and especially in the alternative energy area, we believe are well equipped to have a large impact here.

Quantifying it yet is just too soon for us. But we have proven it on some smaller projects and some startups that it doesn't matter whether we have a branch office close by or not. We can get skilled workers out in the desert where a lot of these energy projects are taking place.

So I think that there's two categories that we will participate in and that's industrial projects, including energy, and smaller infrastructure projects. The smaller -- the infrastructure stuff has not been released yet.

TC Robillard, Signal Hill Capital Group.

I just wanted to -- was I doing my math correct on the branch networks? Did you guys open a couple of branches in the quarter?

Yes, we have opened about one per quarter in the last three but it's mostly been through move-ins of existing locations or we've taken over a couple small competitors too. So there was one this quarter.

Okay, that's fine. I figured as much. I just wanted to make sure I was doing my math correct there(multiple speakers).

And just in terms of -- Derrek, in terms of the DSO impact and kind of the subsequent use of cash, as you guys are looking for kind of revenues to show some slight improvement, I know there's obviously some seasonality coming out of the third quarter but it looks as if a good chunk over the last two quarters of your revenues have pretty much [sat] into Accounts Receivable.

I guess two questions. Number one, was there anything material in terms of timing of billings that might have skewed that? And two, your comment about seeing kind of a greater mix to larger customers, should we be expecting to see kind of a little bit more use of cash from you guys over the next several quarters as you're looking to kind of take that balance sheet as a competitive strength and kind of help fund some of this growth for your customers?

Well let me hit the first part of your question and then remind me if I don't get to the last part. This growth that we have had in DSO and accounts receivable balance, how we take a look at this is we look at it by brand and by customer size.

And as we take a look at it in similar buckets, comparing it year-over-year, we just haven't really seen any level of degradation in the aging of accounts receivable and them getting strung out. This really is larger customers that we're doing business with that are very accustomed to stringing out their payables cycle and that's bled in here.

Now the credit quality of these customers is quite high. So it has increased some of our working capital investment here. But Steve has made some comments, we are pursuing revenue growth wherever the opportunities are in the economy; and at this point in time, there's just been more opportunities with larger customers. So we are not scared of being there.

So should we be modeling out then more cash use particularly on the working capital side for you guys as this mix -- because it appears to me that the mix is kind of part of the way through. We haven't gotten to kind of an anniversary yet with respect to this.

I'm just trying to get a sense of -- I mean obviously it's not a lot. I mean $3 million use in the quarter for where you guys have cash balance, it's not detrimental. I'm just trying to get a sense as to how we should be thinking about cash flows in the near term as you are seeing this mix shift to these larger customers.

Well I would say most of your models are driven off of a DSO assumption. When it comes to the third quarter, this has always been a higher DSO quarter for us. I think the DSO we've got into for this quarter of around 41 is a pretty fair assumption and you should step Q4 down closer to what it was Q2 and I think your models will be pretty close.

Okay, looking at the quarter, it seemed to me that you guys were able to do better than 20% incremental margins that, Steve, you mentioned in your script. Am I just doing my math wrong there or is that 20% number you're talking about kind of a ballpark or taking into account a variety of mix issues and things like that?

It's just the difference between CFO and CEO rounding. So Steve is just rounding this down to 20%. I think right now we are probably closer to 24% in the short term. There's a percent of change as things grow and things move along, but I think right now we're -- and in our 8-K, we've got 6% variable costs in the assumption. So I think we're right in this 22 to 24% mark for incremental operating margin at the branch sizes that we are at right now.

Steve, did I hear correctly that when you guys were talking -- or maybe, Derrek, it was you that mentioned it -- your commentary around the SG&A base. Should we be using Q3 levels as kind as the go-forward level as obviously you have that 6% variable cost? Is that absolute dollar amount a good starting point for us or were there branch closings that were a little bit late later in the quarter that we would need to adjust for?

I think the impact of branch branch closures really this quarter -- because we had about a dozen -- it's going to be pretty immaterial for you. So I think this is a good base to be using.

Everybody has just got to keep it in the context that we are in a seasonal business. We are running maybe 28, 29% of our total Company revenue coming out of Q3. So as long as you're using this as a base that gets adjusted for seasonality, I think you will be fine.

Okay, and then just lastly, just a quick housekeeping question. Could you guys -- I might've missed it, workers comp expense in the quarter?

Yes, let me give that to you. It was 2.9%.

Paul Ginocchio, Deutsche Bank.

Just a question about the branch closures. I think I remember that if you are closing branches, that you thought the true turn in the economy was still beyond six months away. Am I reading that right? I just didn't expect any more closures.

And then second, can you talk about more a little bit about the national strategy? Obviously you got one big account in there. It sounds like you're moving more towards national strategy which I don't think you did before with a lot of branches in smaller markets. Can you talk about some of the prospects you are doing and when you might see a few more larger accounts or one or two more larger accounts? Are you putting any expenses against a national salesforce? Thanks.

Thanks for your questions there. The closings have slowed significantly. A year ago, we had 70 in one quarter and as we went through the first quarter, we had a significant number again and by the time we got to May and we saw things stabilize, we kind of called a halt in a material sense, if you will, to the closings. That didn't mean an exact halt.

We still needed to clean up -- if a branch was losing money and it had lost its accounts and it didn't have the ability to bounce back, we still went through the analysis. Where we sit now and we're happy with the branch structure we have, that doesn't mean that we won't have some immaterial amount to clean up here and there as markets are still shifting and customer fallout is still being balanced.

So we have to take that into account. But for the most part, we are happy with the network that exists and there's not a material amount of closings coming as long as we can hold our trends where they are, even adjusted for seasonality headed into Q4 and Q1.

As far as national strategic accounts go, larger accounts, we've talked about it on this call, we have talked about it over the summer. That appears to be where most of the growth is coming from. Larger, well-capitalized companies are having opportunities to take on projects.

We are finding ourselves better aligned with those larger companies. We do have a strategic direction where we are funding top-level salespeople on a strategic nature to build these relationships. When we reduced the salesforce a year ago as part of the employee count reduction, it was more on a local market, one that was chasing small accounts, onesie, twosie business.

We are still out there chasing it, but in a different way with the branch manager being well trained to drive sales on the local market level. We kept funding and have continued to pay attention to large accounts.

We have in every one of our brands, a strategic approach to knowing who is growing, how they're growing, what staffing needs they have, who they might be using, what their price point is, what would the ability to help them take on the next project or if you will just take away business from the competitor. And on all fronts, it is working. We're having success where we help take on the next project that wasn't already being staffed by somebody else and we have many success stories of where we are taking business away, whether it be from a small local company that's not -- a staffing company that's not as well funded or we're competing on a national basis with some of the bigger players.

But where we are competing, we're winning on our serviceability to recruit the right people for the right job and have them in the right place. And what we can do better than anybody else is we've got that nationwide network built in two ways.

One, still recruiting in a local community basis from our large labor ready branch network; and two, the snatch national reach that we have to recruit skilled physicians through this technology approach. And that's how we have been funding these large projects that we have talked about in Q2 and Q3.

This is not coming through our traditional branch network, this growth. It's coming from a [pretty low cost] structure all being recruited out of centralized locations and that's a power we have to play that we didn't have a few years back and we don't believe those participating in the blue collar markets have that ability. And that's just going to get stronger and stronger for us.

So it's twofold -- one a salesforce approaching national accounts in a more strategic nature and then having the ability to recruit the workers and get them to these far reached locations. Derrek spoke in gross margins about a per diem charge.

That is something new that has come out over the years where we are funding the travel costs of skilled workers to get to these projects. So, yes, the dynamics of our business are changing. We are on top of it and I believe it's going to be a growth area for us.

Great, if I could just ask a couple housekeeping questions maybe of Derrek? The large customer was $10 million better in revenues -- it's not $10 million of revenues in the quarter, right?

It was -- yes. So if you took the revenue that was in our run rate in Q2, we added an additional $10 million on top of that in our run rate this quarter.

Great.

Make any sense?

It does. Any idea on (multiple speakers)

$10 million more than Q2 this year.

Perfect. In October, organic or same branch trends, can you give that?

October?

Yes, October, I guess both with the large client and without?

No, I don't have that with me. And quite frankly, we don't get into really disclosing it. But what I will tell you is I think you can take a look at our guidance.

If we see anything that is significantly either ramping to the positive or to the negative as we enter the new quarter, we wrap that into our guidance and it will generally pop out. So I would say that our -- we talked about our revenue trends being stable this quarter. That has continued into this quarter. But I don't have a percentage for you.

(Operator Instructions) Paul Condra.

You spoke a little bit about how your client base has changed. You've kind moved to these larger clients. I wondered if you could talk at all about how the geographies that you are in have changed or maybe -- if you can't give specific locations, what are some of the demographics of the markets where you're seeing the most growth, things like that?

On a geographic basis?

Yes. I mean are these big, big cities or are you out in the small towns? Things like that.

These large projects that we're taking on are popping up all over the place and it's usually out in smaller areas because that's where we are able to erect windmills, work on energy [clients], get people to work in various locations. And so most of these larger projects have varied. It's not urban growth. It's not onesie, twosie business out of our branch networks.

As far as -- if I take out the large projects and go down to the branch network level, it's been pretty broad based that we have not over the last couple quarters seen a significant difference. As the economic downturn came on, we saw Florida and California start most of the falloff and we talked about this back in 2007.

But as things got worse and really over the last two to four quarters, things have been broad based and have hit almost every geography the same, both small towns, large towns, and such. Now I did comment that industries served especially across the broad branch network, manufacturing and distribution is seeing an uptick and most of that is coming out of the Midwest.

So we are starting to see some geographic impact there, some of it driven by -- I think as we mentioned last quarter, Cash for Clunkers started it but it's continuing well beyond that. I think some of the Midwestern towns that support the auto industry are showing some pretty good growth.

The second and third tier suppliers that service the large players, the large manufacturers, auto manufacturers are showing growth. And we have had a long-standing relationship with the brands that we run with many of these suppliers and these are old-time relationships that are coming back on board. So I think we have a foot in the door in these Midwestern states for those reasons. It's going to be good for us.

Great, thank you. Just one more. I wondered, over the third quarter, what do trends look like just on a month to month basis?

I will just refer you if you want to take a look at our 8-K filing, we've got monthly same branch revenue comps in there and you can look at them across (multiple speakers)

I apologize, I didn't see it here. Okay, that's it for me then. Thanks.

TC Robillard.

Just two quick ones. Sorry if I missed this. The wind down of the large client, did you say that that project is expected to wind down by the end of the year? Did I hear that or am I just (multiple speakers)

It won't be 100% done by the end of the year, but it's probably hit its peak and maybe this ramp-up we've seen in the third quarter will start to wind down. But the project will still be continuing into 2010. It's just this ramp-up has slowed down. So it's taken into our guidance that we have given today.

Okay and I guess just exploring this a little bit more, obviously you've got to keep the cards close to the vest with this customer. But is this a very discrete project or is this a situation where this customer has some other projects potentially down the road that you guys could basically see this relationship kind of continue to expand or at least maintain for a long period time?

Yes, this project and competitors of this Company have projects and this is kind of a new thing for them to use staffing. So we have proven ourselves very well.

We get very high satisfaction ratings on this. It's proven by the fact they kept us on the engagement way longer than they intended to use temporary staffing and I think we have proven ourselves out pretty well on this. How it will play out, we'll just see. We will keep developing the relationship but there's no projections beyond what we have given at this time.

If I could just add a couple of things on the back of that, TC. We have -- the size of this customer is not that far off from what a lot of other industrial carriers use in their portfolio.

It's a little bit unique for us. And so we wanted to be very transparent with all of you about the size of the customer.

So the exact wind-down date of this, we can't be sure of. The thing that our sales force is the most excited about is that it is a very prominent customer. We've got a very good track record and we're very hopeful that it gives us the credibility to have entrance into a few other markets that have traditionally not used staffing to this level.

Okay, that's perfect. That's exactly what I was just trying to get a sense of. And then just lastly, Steve, you mentioned in the prior question, the answer to the prior question, you had mentioned Florida and California. Any comments you can give us on those markets?

Are those just bouncing along the bottom or have you guys seen any types of rebound? I know part of your push at one point was to switch directions to get more away from construction. Can you just kind of give us an update on those markets?

I don't know if we've pushed to get away from construction. Construction is unavailable. We will be the first in line and the first there to serve the customers that we served in the past. And yes. Historically Southern California and Florida were huge construction states and we're just not banking on that right now, but we will be prepared to serve them.

Any movement in the year-over-year growth declines in both of those states is mostly just winding out prior year the tough markets that existed a year ago period. It is getting easier on a year-over-year basis in both those states which means that they're not getting worse but they're both still very competitive states, Florida and California.

The business mix is having to change in both of those states and it's taken us a while to find that business and actually get businesses growing again and needing staffing because there's so many people unemployed in those two states. But I think as far as Florida goes, we will see it first.

I think there's more demand there or less supply, let me put it that way. So I think we will see some pickup in Florida first. The supply seems to be pretty high in California still as far as unemployed people and available staffing organizations to staff them. But our California team is fighting pretty good. I'm impressed with where we are and what the prospects are and their ability to change their own business mix to be healthy down there.

Mark Marcon, Robert W. Baird.

Good afternoon and nice progress. I was wondering if you could talk a little bit about the type of pricing that you're getting from some of these larger clients and what sort of mix you now have from the larger clients. Because the gross margins are holding up. Typically with larger clients you typically see lower pricing. I was wondering if you could give us a little bit of color on that start with.

First off, Mark, the margins have been pretty good on the large accounts. However, the longer they go on and the more permanent you are on site, then the margin squeeze comes on and that's kind of where we are.

We have lasted longer on this one project in particular that with that lasting longer is also becoming some margin squeeze which we are okay with. We'd rather stay on site with lower margins, the ability to keep our people engaged.

We were rewarded for finding these folks quickly on a nationwide basis and ramping them up and getting them on site. And now the cost structure around keeping them on site for us is a little bit lower anyway and Derrek even referred to that, that the margin mix because of that is reflected in Q4.

It reflects that, that we are giving a little concession on some of this one large project to help -- tp stay engaged with it. Overall, we are not necessarily seeing a margin squeeze because of our approach to strategic accounts, national strategic accounts.

One of the things that impact us is compared to our historical margins is that in the construction business, it wasn't uncommon to get mid-30s and even approaching 40% margins. And so as that winds down and becomes a smaller percentage of our portfolio, that in itself puts pressure on margins, not that we're giving price concessions on the other business or the next business, it's just this quick fill, high turn environment of the construction business where every contractor needed five people and they needed them now really drove 36 to 38% margins a lot of the time and with that really not being available.

The rest of our business is holding up pretty good. But those are the [big] parts of the business that are growing, manufacturing and distribution, and we are fighting away, we're holding our own. It's just becoming a bigger part of the portfolio.

Great, and then did you talk about the -- when we take a look at the monthly revenue trends, the same-branch trends, obviously nice improvement as the quarter unfolded. I'm wondering, how much of that was due to that large account? Did that ramp up? Did that kind of hit peak early in the quarter or did that just keep ramping all the way through the quarter?

I'll take this one. Let me give you a couple of stats. Keep in mind, while the large customer revenue ramped up this quarter, also our traditional business was also seasonally building this quarter. So if we are talking about what was the impact of same-branch revenue trends as far as improving deceleration in this decline, it did not have much of an impact.

Let me see if I can help with this a little bit, Mark. I'll see if this is on point. For Q2, our same-branch revenue decline was 27%. And for Q3, it was about 19%.

But you can see that the year-over-year decline, it got better by 8 percentage points. If we exclude the growth from the large customer out, our same-branch revenue decline in Q2 was 32% and in Q3 would have been 26%.

So it would have been about a 6 percentage point increase if we're looking at things sequentially. I don't know if that helps at all or not but as far as our monthly comps for the quarter, this growth in the large customer did not really make a significant difference in the trend.

That's very encouraging. Can you talk a little bit about PlaneTechs and CLP and what you are seeing there and how successful you are being in terms of transferring those brands to the different skills?

Yes, we've had a great amount of success this year integrating all of our acquisitions in both from a support and administrative standpoint of reducing costs. A lot of the cost structure that we've talked about was ensuring that all of these brands are working well together from an administrative standpoint.

From going to market, a lot of this growth we're talking about is coming out of some of these skilled positions, whether it be industrial skilled positions, welders, mechanics, even truck drivers, we have seen some great opportunities around there. And this centralized business that I have talked about, this centralized recruiting opportunity, is driven by -- out of PlaneTech, CLP, the truck driver business at TLC and those are really the three brands that use centralized recruiting, dispatch and ability to not need new branches to take on projects whatever small town in America they might be in.

So we are real excited about these brands. We believe that the impact we're going to have to be flexible versatile and get workers in the right spot, the expertise to know how to pay the per diems, show them how to travel -- we even have an opportunities to move people around clear across the United States if they have an expertise. If we find them in the Southeast, we can move them to the Northwest. We can move them to the Northwest -- Southwest, sorry about that; all over the place.

So the expertise is growing and we think that the approach of having five brands is going to pay off for us really big and this business is seeing this recovery. But it gives us the versatility to go find the businesses that are growing and not just be a local organization that serves local contractors.

Don't get me wrong, we love that growth during the construction boom years when every neighborhood especially across the West Coast and the South was building new neighborhoods and building homes and we could get as many workers as we could out of these neighborhoods and after these construction sites and we will still have that ability to do that when construction returns which we believe that it will. But in the meantime, we're chasing larger projects, larger construction projects with larger opportunities through these new skills that we've brought on through these acquisitions that we have done.

Terrific. And can you talk a little bit about how you're thinking next year, particularly with regards to the gross margins and what might happen with state unemployment taxes and workers comp?

Well let me give a couple of directional comments about 2010. The good news about 2010 is there's not any wide spread minimum wage increases. And I will tell you, this has been a serious battle that we have been up against the last three years because these minimum wage increases have impacted about 80% of revenue in Labour Ready brand and Labour Ready brand makes up two thirds of our revenue.

So I guess what I'm telling you is that there's been 50 to 60% of our revenue has been impacted by minimum wage when we have had virtually no ability to reduce pay rates to maintain some gross margins. So our Labour Ready team has just done a great job fighting through this. I don't know, there's maybe two or three states next year, they're mostly Canadian provinces. So that issue is a nonrecurring one for us.

Number two on workers comp, we've still got some good momentum here. We have reduced work comp by -- at least our injuries over the last six plus years over 60%. We're not going to reduce that another 60% over the next six but we're not done yet. We're still doing very well on our safety programs.

We're still making increases and improvements year-over-year this year in safety and integrating our brands. We have adopted a lot of best practices into our brands and I think we've got some good things going on the claims management side as well. Those are the good things.

Let's come around to payroll taxes, specifically unemployment tax. I'm not telling you guys anything you don't already know. There's been a lot of jobs lost and unemployment taxes, they're going to go up next year and they're going to go up for everyone including us as well.

It's too soon for me to tell to give you a range on this. We have an internal finance team, some outside consultants that we work with, closely aligned with operators of each of our brands. And the way this process works is we move through a monthly forecasting process which we're involved in right now and communicate this with our brand presidents and we start billing for these increases in December with new customers and in December start having conversations with existing customers about where bill rates need to go.

So that's the structure. Sorry, Mark, I can't give you a lot of context around what it might be because we just haven't gotten there yet.

We know they're going up. We just don't know how much. Can you give us a sense for this year how much it would come out to as a percentage of revenue roughly speaking?

Ask me that one more time, Mark.

(inaudible) as a percentage of revenue, how much it was for this calendar year, roughly speaking?

No, I don't have that one in front of me. I will give you this context. If we went back to 2000, the last recession, we saw an increase in unemployment taxes somewhere around 40 basis points in the three to four years cumulatively after the recession. I will give you that number -- it's a little dangerous because there's all sorts of stuff in there and state mix and everything. But that gives you some basis from the last downturn.

Terrific, thank you.

As there are no further questions, I will turn the call back over to Mr. Steve Cooper for closing remarks.

Thank you. We appreciate the time today and your support and the questions and we look forward to talking to you in the future. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.