TrueBlue Inc (TBI) 2009 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 CEO Steve Cooper and CFO Derrek Gafford. They will discuss TrueBlue's 2009 fourth-quarter results, which were announced today.

If you have not received a copy of this announcement, please contact Teresa 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's CEO and President Steve Cooper and CFO Derrek Gafford. They will be discussing TrueBlue's 2009 fourth-quarter earnings results, which were announced after market close today.

Please note that our press release and the accompanying financial schedules 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 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 fourth-quarter results and our outlook for the first quarter of 2010.

Today, we reported net income of just over $2 million, or $0.05 per share, for the fourth quarter, on revenue of $262 million.

The fourth-quarter revenue was about $20 million better than what we had anticipated when the quarter began. This was driven by two primary factors. First, the demand in manufacturing, wholesale, and retail end markets remained strong throughout the quarter with additional momentum in December. And second, the one large customer project we had reported throughout this year continued stronger through the holidays than we had anticipated.

The revenue momentum we experienced throughout the quarter has continued into January and is reflected in our guidance issued today.

2009 was a year of many challenges for all businesses. Flexible staffing is an important variable for our customers in running their own businesses. We have seen through various economic cycles that our customers use flexible staffing as a method to control costs early in the front end of a down cycle.

We've also seen throughout time that once they have stabilized their own cost structures, they turn to flexible staffing quickly, and demand can be explosive.

Our results in 2009 definitely reflect the dynamics of the points of the cycle. In the first quarter of 2009, our same-branch revenue declined by just over 30%. In the fourth quarter of 2009, our same-branch revenue declined by only about 6%, and in December of 2009 we actually returned to growth in same-branch revenue by producing 5% growth. And the trends are continuing into the first quarter, as we are expecting our revenue-growth momentum to continue.

The strongest area of growth for us currently, outside of the one large customer project, is overall manufacturing growth. We are seeing that the customers are adding back full shifts to their production units. They are turning to flexible and contingent staffing to fill the bulk of their needs for third shift and weekend work shifts.

As their orders continue to ramp up, they need to ramp up their production units quickly, and the number of employees they order from us is in larger quantities than our standard orders.

In our light industrial business units, we have seen large increases quickly. Our light industrial business grew by over 20% in the fourth quarter, and the growth in January of 2010 continued.

In other industries served, such as retail trade, wholesale trade, and services, we have seen modest improvement also in Q4 to the declines experienced throughout 2009. That improvement has continued into January, also.

However, we are still seeing slight declines in most industries served outside of manufacturing, which is growing rapidly, and construction, which continues to struggle.

Our construction business in 2006 was approximately 40% of our business mix. In 2009, it fell below 25% of our total mix. In the fourth quarter of 2009, our construction business continued to decline at about 35% compared to a year earlier.

This trend is not worsening. It just isn't improving yet. New building permits continued to decline throughout 2009. In California, that represents four years in a row of declining building permits, and Florida has experienced three years of declining building permits.

We have seen the mighty freefall of building permits stabilize and we are waiting for signs of improvement in those numbers as the housing market gets revitalized. That would be the beginning signs for both residential and commercial construction to take hold.

Those are difficult conditions to operate in when you take into account that our business in those states was over 50% construction at the peak in 2006.

Our teams have done a fantastic job in adjusting the size of our operations to control costs during this unprecedented time. Our on-demand business mix has adjusted during this time period and sought new avenues to serve customers and grow our business.

However, our COP division is heavily weighted in California construction, and we are continuing to work through the adjustments needed to ensure that business unit remains profitable and strong during this cycle.

Both residential and commercial construction are being hit equally hard at this point in the cycle throughout most all areas where we operate. California, overall, continues to be hit hard in all industries compared to other states. Our teams there continue to show our customers the value of flexible labor, and California remains our largest revenue state with about 15% of our revenue.

With the difficulties remaining in the economy in California, we are continuing to experience declines in California of about 20%, compared to a year ago.

Texas is also a large state for us with just under 10% of our revenue there, and we are continuing to experience declines in Texas of about 20% also.

On a brighter note, Florida, which is just under 10% of our revenue, produced growth in December and seems to be on a good trend for recovery there after three hard-hit years.

Most of the strong growth in manufacturing is showing up in the Midwestern and Southeastern states.

This past recessionary cycle resulted in the largest drop-off in demand in the history of the staffing industry. Our response to that significant drop in our revenue throughout 2008 and into the beginning of 2009 was to reduce operating costs across all areas of the Company.

We reduced our branch network by about 200 locations to our current count of approximately 750. We reduced our employee headcount from about 4,000 at the beginning -- two years ago to our current count of approximately 2,500 now.

Excluding the acquisition-related SG&A added in 2008, we have taken nearly $100 million out of core operating costs during those two years, with $70 million of that showing up in 2009 alone. You can see from our guidance today, we have projected our costs will remain at these reduced levels throughout 2010, outside of the variable costs associated with additional revenue as we experience growth.

We will only add branches during 2010 on a selective basis, based on recruiting needs associated with new customer wins. We will not need to add a significant number of new employees to support the growth, as each office and employee have capacity to handle more revenue. Our current per-office revenue is just over $1 million, and we believe we can be very efficient with our resources and hold fixed costs in line even as revenue improves 50% per office and 50% per employee. This will produce significant leverage for us in our business as growth occurs and we continue to manage our business with tremendous discipline.

Just as we are experiencing significant operating leverage, as we did after the last recession, we are confident we should experience this during the anticipated recovery and believe we should once again be the first to see it and enjoy that strong bottom-line impact with a slight pick up on the topline.

We believe our niche approach of going to market with five distinct brands has set us apart as a leading provider of blue-collar staffing in the United States, as customers prefer a staffing provider that exclusively focuses on their needs and business model. 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 should 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 as we see opportunity. And 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. 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 positions ranging from mechanics to drivers and several other skilled trades positions.

We can 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.

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 and prepared to prosper in a recovery.

2010 brings excitement through all areas of our business. Our employees enjoy serving customers and workers. Growth in demand gives everyone a chance to do what they love, put people to work.

However, 2010 brings a new set of challenges with rising employment costs, such as minimum wage increases, as we saw in 2008 and 2009 and now rising unemployment taxes in all states.

The increases in unemployment taxes will be a challenge for us. During January, we have experienced declines in our gross margins as a result of the increased unemployment taxes. Derrek will give more details on this trend.

In addition, there is continued pricing pressure as all staffing companies are hungry for growth. This is giving customers the purchasing power for now.

We believe this is all part of the cycle and we will work with our customers throughout the year. And as growth continues in the recovery, the pricing pressure will subside and customers will accept the increased employment costs as they will also see this with their permanent staff. This same cycle has occurred in previous economic recoveries, and we remain confident we can work with our customers to recover these costs as we move through the year.

At this time, I'll turn the call over to Derrek, 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 for Q4 declined 13% in comparison with the same quarter a year ago. Please keep in mind when looking at our overall revenue decline of 13% that nine percentage points of the decline is related to branches we decided to close over the last 12 months.

On a same-branch basis, we continue to experience improving trends. Here are a couple of points highlighting the last two quarters. First, Q3 same-branch revenue declined by 19%. Second, Q4 same-branch revenue declined by 6%. This result in a sequential year-over-year improvement between Q3 and Q4 of 13 percentage points.

We often get asked about the impact from the revenue related to our largest customer. So let me provide some branch revenue -- some same-branch revenue statistics for the last two quarters, excluding this revenue.

First, Q3 same-branch revenue would have declined by 26%. Second, Q4 same-branch revenue would have declined by 16%. This would've resulted in a sequential year-over-year improvement between Q3 and Q4 of 10 percentage points, if the revenue related to our largest customer was excluded from our trends.

For the first quarter of 2010, we expect revenue in the range of $230 million to $240 million, which is an increase over the same quarter a year ago of 5%. Please keep in mind that Q1 is our lowest revenue quarter due to the seasonality of our business.

Now, let me provide some background on gross margin. Our gross margin for the quarter was 27.8%, which was about what we expected, but lower than the 29.3% we reported same quarter a year ago. The year-over-year decrease in gross margin this quarter is primarily the result of competitive pricing pressure, an increase in mix of larger customers, and a decrease in construction mix.

Looking to Q1 of 2010, we expect gross margin of about 25.5%, which is a decrease of about 230 basis points from Q4 2009's gross margin of 27.8%. Let me take a moment to explain this by taking the sequential decrease in gross margin between Q4 2009 and our estimate for Q1 2010, and break it down into three categories.

First, about 50 basis points relates to a pricing decrease granted to our largest customer. Second, there are two standard factors that decrease sequential gross margin by 50 total basis points at this time every year. We have the annual reset in unemployment tax wage basis occurring in January and a standard mix impact related to our higher gross margin construction business being at a seasonal low point for the year.

Now let me finish off with the third and final category. About 100 basis points of the decrease are due to widespread increases in state unemployment taxes.

While we are not providing annual guidance, one thing that I would like to point out on gross margin is the seasonal increase we have historically experienced in Q2 and Q3 related to a higher mix of outdoor work, which usually produces higher relative gross margin. Gross margin has historically increased by about 40 basis points in Q2 and Q3 in comparison with Q1 of the same year.

Let me add some comments on sales, general, and administrative expense. I'll start off by discussing our annual SG&A, and then provide some commentary on Q4. SG&A for fiscal-year 2009 declined by $70 million, or over 20% in comparison with last year. This was primarily the result of closing or consolidating 200 branches over the last two years.

Likewise, we have reduced our field management headcount, consolidated support functions -- corporate support functions, and reduced a variety of program costs. On a year-over-year basis, headcount is down 18%.

These reductions were necessary to scale our cost structure to the level of demand for our services, and I can confidently tell you that our Company has now adjusted to this new baseline.

For Q4 2009, SG&A declined by 17% in comparison with the prior-year quarter, which outpaced Q4's year-over-year revenue decline of 13%. Included in Q4 2009 SG&A is expense of about $0.03 per diluted share related to downsizing actions we have taken to reduce expense in future periods. For the first quarter of 2010, we expect SG&A to be about 26.5% of revenue, based on the revenue estimate provided today.

Let me finish off here with a couple final items on Q1 2010, and then touch on operating leverage. For Q1, we expect net loss per diluted share to be $0.06 to $0.11, and CapEx of about $2 million for the quarter.

In regard to operating leverage, our number-one priority continues to be same-branch revenue growth. We expect incremental operating profit on same-branch revenue to be in excess of 20% as we maintain our fixed-cost structure and add a minor amount of variable SG&A to support additional gross profit dollars produced.

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

(Operator Instructions). Jeff Silber, BMO Capital Markets.

Just a couple of pieces of clarification, Derrek, just on the guidance. What tax rate and share count are you assuming?

Well, you'll hear the same thing from me that you've heard from pretty much every CFO trying to give a tax rate estimate, just because it's not entirely variable.

But I think a good tax rate to use at this current revenue volume is going to be a little over 40%. We've had a couple of years here where it's been under 40% and we've had some nice windfalls from tax credits.

You know at revenue levels above this, you'll get closer to -- or profitability levels above 2009, you'll get closer to 40%, and if you're modeling in something with lower profitability than what we have right now, you'll approach the mid-40s.

Okay. Again, I'm sorry, the share count you are expecting?

From a share-count perspective, if you take a look back, our share count, at least on a weighted-average basis, increases by maybe 150 -- 1,000 shares or so a quarter. And I think that's a pretty reasonable expectation to use for the future.

Now getting back to the business, I don't know if it was you, Derrek, or Steve, when you talk about the gross margin, you talked about some pricing pressure. Can we get a little bit more color? Where are you seeing that specifically?

It's interesting, Jeff. It's coming from a couple different sources. First is with the additional unemployment costs that are coming on, so that's creating a conversation between our -- us and our existing accounts of trying to get that passed through, and probably not even quite half the time, that's not going so well right now.

The story comes back of, well, we haven't seen that yet in our business and we're not sure where it stands, but being a staffing company, we are more on top of that. We know the current structure. We believe it will be showing up in first-quarter bills, statements, state-by-state with our customers, and the information playing field gets leveled pretty fast here within a quarter. So that definitely is going to help.

On new accounts, as I'd mentioned, all the staffing companies are pretty hungry right now. And lots of activity out there. Lots of door knocking, lots of direct mailing, lots of cold calling, and as the pot's being stirred and activity is picking up and orders are coming in, customers are -- they have choice. And at this part of the cycle, you see that conversation come up more than at other parts of the cycle, that that choice is there, and so you got to keep your pencil pretty sharp at this stage of the cycle.

We don't believe that lasts forever. Supply and demand have to balance themselves out here, and as we've seen in previous cycles, it doesn't take long and the playing field then again gets reset. So that's kind of what we're talking about there, Jeff.

And actually, just a follow-up on that. When you talked about the lower gross margins this quarter relative to last quarter, one of the aspects you focused on was a pricing decrease for your largest customer. Is that the same large customer that you highlighted from a revenue trend perspective or is this a different customer?

No, it's the same customer that we've talked about during 2009, and we've served well, and as we mentioned in previous quarters, it started out to be a fairly short-term project and it turned out to be a longer-term project. So as that need became longer-term, then they came back to the table and said, hey, to plan a long-term basis, we need to get the costs closer to what we could do it ourselves, and so there was some adjustment there.

It was well worth it for us. We've got this project ramped up and we want to stay on it as long as we can, and these concessions help us do that. So it's still a very profitable account.

Okay, makes sense. And just one more quick numbers question, you were kind enough to give us the percentage of revenues that came from construction in 2009. Can you give us the other buckets, just in terms of service lines, where your revenues came from last year?

Yes, you want a breakdown by major end market?

Yes, that would be great.

I'm going to give it and I'm going to round them all to the nearest 5% or so. So, hopefully this adds up to about 100%.

All right, I won't hold you to it.

Construction, about 25%. Manufacturing, about 25%. Transportation, about 15%. Wholesale trade, about 10%. Retail, about 5%, and services and others, right in between 15% and 20%, so you're going to have to round that one to whatever it takes to get to 100%.

T.C. Robillard, Signal Hill Group LLC.

I just wanted to drill down a little bit more into this large customer, and not to belabor this, as you guys have done a great job of calling this out ever quarter. I guess I'm just trying to get my arms around the wind-down and I know that's a moving target for you guys. Are you at a stage now with the price concessions that you're giving that you're expecting this customer to be as large as it has been for the last few quarters as you go through 2010, or are you still looking at a peak in revenues and then a slow wind-down as you go through the year? If you can just give a little more color there, that would be helpful.

It appears that we have hit a peak with the project, and now we've given a little price concession, so the profitability will drop a bit from here, but it's still a great, great account for us.

I would say, from our best estimate to this point in time, that the levels that we've served it during the third and fourth quarters hang on during Q1 and Q2. But it will be in a wind-down situation, even with the pricing concessions given.

And at some point, it will find a stable base. I don't believe it's going to go away 100%. But the estimates right now is that we can hold on here for another four months to six months before we start winding it down.

And Steve, just to clarify with winding down, are -- when you're talking about winding down, I'm assuming you're just talking about what has been incremental revenue in 2009 versus kind of where the base was with this customer in 2008, or are you talking about this customer winding down from -- I think in your last Q, you called it out to be, like, 13% of estimated 2009 revenue.

Is that going to go from that to zero, or are we going to get back to a base rate where you were before this customer started to accelerate with the new project?

Well, it's not easy to project at this point in time. This was a unique situation. I think, in the K, there will be more information about this account.

It was a unique situation for this customer to use a staffing agency like ourselves and it's not been part of their long-term model. However, they've been very pleased with the performance of our workers on this account. They've been pleased with both the production and the cost associated with it.

However, changing the culture isn't easy. So, working with this customer, being respectful of their culture, and our team working with them very efficiently, they've become great partners and we have high hopes that we can be a long-term partner here, that, T.C., I can't really forecast at this time. I only go off the feedback the client gives us.

And long term, we hope to be a good, solid partner, but the current culture says let's do it ourselves.

And that's fair, Steve, and I completely understand that. I guess what I'm just trying to reconcile is I understand that this customer has been a customer for much longer than 2009, and I'm just trying to get a sense of when you're talking about this, are you talking about this incremental project that they did or are you talking the customer as a whole, even your 2007, 2008 exposure to them, was all around your comment on the fact that it was a customer that traditionally doesn't use temporary help?

Well, I still have to stay in the camp of I just don't know. We are serving it so well, we've stayed on there longer than we had hoped.

This started out as a project. So that probably is the best answer. In 2008, this started out as a project. (Multiple speakers). So we've been on this project for two years. We've served it successful. The client gives us great satisfaction marks. Our team has ingrained partnership with them. We've got a good service contract with them. We are meeting all of our expectations.

And it's going well, except you just can't manage cultures. So we're doing well right now and we hope to do -- we hope to stay on. But all of the revenue associated with this was a project, to start with, and -- so we've done well to hang in there.

Absolutely. I agree that you guys have done very well there. I guess, Derrek, can you give us a sense of -- would your same-store metrics for the month of December, not the quarter, for the month of December, have been positive year on year, excluding the large customer?

I don't have that with me. But it would have been close, and it's -- I don't want -- we're not going to give information by month with this customer because it's project-based. It's big. It can kind of vary things around.

But, it would have been close. I haven't -- I don't have that number or that calculation in front of me, though.

Okay, and then just one last one, and I'll jump back into the queue. Steve, can you give us a sense -- I just want to drill down a little bit more on your comment in your prepared remarks about the fact you were seeing slight declines everywhere in your end markets except from manufacturing. And I just wanted to get a sense for kind of retail, wholesale, transportation -- basically everything aside from construction and manufacturing. Can you give us a sense as to how those trends have been, maybe either month to month or quarter to quarter?

Yes, I can just kind of talk quarter to quarter since they do bounce around a bit. But since the beginning of the year, all of these end markets that Derrek gave you the business mix in, except for transportation, were 20% to 30% declines, and that's kind of where our average was.

I made the comment that same-branch revenue went from 30%-ish declines, and we've improved all the way to 6% declines. So as you look at how we've come through the year, manufacturing obviously being our strong suit, but the rest of them still in the teens. Most of these business mixes that Derrek referred to and gave you the percentages are in the teens.

And that's year on year, correct?

Year on year. Fourth quarter compared to fourth quarter, it's ranging from the low teens to the high teens, except for construction, which I gave at 35% declines.

Paul Ginocchio, Deutsche Bank.

Just a follow-up on that. That low teens to high teens, if I back out construction, I would've thought the rest of the business grew 20%, so you're excluding the large contract when you talk about those other end markets?

Yes, because the bulk of that is in manufacturing.

Okay. And then, what kind of assumptions have you made in the first-quarter gross margin for passing through a cost increase to help offset some of that unemployment insurance?

Well, what I talked about here is -- I just really tried to break up the unemployment tax impact between what's normal based on resets and what is coming at us from a real increase perspective. And from a real increase perspective, it's slightly over 100 basis points, so we have not built in a lot of passthrough.

We might be able to do a little bit better than that. We expect to do substantially better than that by the end of the year. You know, it might be a little more challenging for us than some of the larger players. Keep in mind that we are serving a lot of small to midsized customers.

And there's been a lot of misinformation out in the press on unemployment taxes. So, many of our customers, particularly the small to mid-sized customers, they've not received a bill yet. And so, we are, in many times, the first point of education for them on where unemployment taxes are going.

So, that gives you a little commentary on what we expect directionally from a passthrough perspective, and then a little bit of perspective on what we're dealing with in talking with customers.

Okay, if I could just sneak one more in, about January. I know you don't give January trends, but the recent trajectory has been pretty us solid. I'm just wondering if, in January, if you're already seeing -- I mean, the comps don't get that much easier in the first quarter than December, so I'm just wondering if you're already seeing if what you think is the steady state for the first quarter or you're still expecting acceleration versus what you saw in January?

Well, we are expecting, at least on a year-over-year basis, some acceleration. We are really -- the midpoint of our guidance is revenue growth of 5%, and keep in mind that we've still got some carryover drag on our revenue from revenue from closed branches of maybe minus 5 for the quarter. I'm referring to the first quarter.

So, you're not supposed to do this with percentages and add them together, but if you do those two together, that's going to get you close to 10% same-branch revenue for the quarter. So, we ended December at five.

It sounds like you weren't there in January yet.

All the way to 10?

Right.

We're on the right trajectory.

(Operator Instructions). Mark Marcon, Robert W. Baird & Company, Inc..

I was wondering if you could talk a little bit about, not specifically the large client, but the industry that they're in. You had talked previously about potentially making some headway into some of their competitors. Are you seeing any of that?

Yes, this has given us a pretty good resume to talk to other competitors about. Like I mentioned, there's going to be a little more information about this in our 10-K.

We've chosen not to talk about it yet because we are still working with that customer on what those disclosures will look like and how we want it to be worded, or I would go ahead and talk to you further about it today. But it's -- it not only just builds a resume, it builds credibility with the team that's been there, done it, and it's easier to approach other people that are in similar situations and show a track record.

So, we had the ability to do this type of recruiting. We've been doing it on a smaller basis. We were given the fortunate opportunity to -- for our team to test their capacity, and they did an outstanding job and that feather in their cap will stay with them throughout their careers and throughout this business lifecycle.

So they are going to be able to use that over and over again as a huge credential in this sector, no doubt, and it's working, and we are showing growth on a few of the things. It's one of those things that you open eyes to a new industry that hasn't necessarily used this type of service, and we are going to make some headway. We'll be able to talk more about it on our next call, once there is full disclosure about who the customer was and what the industry is.

Okay, but in generalities, if this other client is going to wind down in four to six months, I guess what I'm wondering is how much of that do you think you might be able to replace? Does it look like it's promising that you could end up replacing it with one of their competitors in the same industry or, you know, is that too optimistic or too much to hope for?

I think we just need to leave the risk as we've stated it, that we've put a significant amount of revenue into one basket. We've served it well, and you can imagine our team is working like crazy to make sure that we find a home for every one of those people when they roll off this project.

But I really can't give you much more insight because I just don't know, Mark. But, it's -- we've got quite a resource at our fingertips to put to work here in our team. We've got the most talented team in this space. They created this. And we will see.

So if this project does peak in six months, they've got a lot of runway to work with. And, we'll go from there.

Okay, and it's been a couple of quarters where we've been talking about it peaking and running off. Are you feeling -- is your level of certainty that it's going to run off greater now than it was previously?

It's about the same. The customer is a pretty straight shooter. You know? Thank you for your work, we have appreciated it, you've performed well on our service agreement. Hey, but this is our business, this is how we've run it through these years, and this is how we intend to run it in the future.

And our team keeps leaping over hurdles and serving well and costs come in lined as well or better -- actually better than they could do themselves with higher productivity, and the customer's eyes remain open. So, yes, I could give you the optimistic view, but you can make that one up yourself. We've had some great success here.

I'm just wondering if they were more definitive in terms of, yes, it's absolutely going to wind down relative to the way they were talking two quarters ago.

It's not like that we know for sure there is a circus in town, and the circus is leaving. It's not quite that definitive.

This is a process that's going to continue. They're going to need people. So it's not like the people need ends. If they take this on themselves, they've got to replace the people that we've put on site for them, and they don't take our people over. So they're going to have -- they've got to figure out how to do this themselves, and we know the facts of the matter and we continue to serve this customer and be their partner.

I'll look forward to the K so we can talk it more. Can you talk a little bit about what you're seeing in terms of on demand relative to some of your other niche brands and how those trends may be different? You're fairly clear with regards to the CLP, but wondering about PlaneTechs, etc..

So speaking of the On-demand brand, that's the one that we usually see in the front end of a cycle take off quickly, and things have stabilized there well. Outside of the specifics that I mentioned in my prepared remarks, the fact that California and Texas continue to struggle will put pressure on the Labour Ready brand and the fact that construction struggles will put pressure on that brand to be explosive, as it's been in the other up cycles out of the recessions.

With that said though, they have hustled, they have bustled, they have retooled, they've got teams focused on new verticals, new industries, and it's working. So we are seeing growth around that, but it's not in high quantity like we are seeing it at Spartan, in the light industrial. And I've talked quite a bit about that.

The reason being, as I mentioned, when you have the ability to add 50 people because you fill the entire third shift, or you fill the weekend shift, you put a lot of people to work quickly, and that's what we're seeing in the light industrial space in the Midwest, Southeast, these little manufacturing sites. So that's explosive growth that's fun to participate in, and we're proud of our team there that's doing it.

So that's a little bit of comparability of what Labour Ready is seeing is they're not as in sync with being able to put the whole shift together because that's not their forte right now. They were built on speed and they were built on quantities and more project-based business.

So, I believe this is a little more sustainable with the way it's coming back. When businesses have said, let's fire up the third shift, let's fire up the weekend shifts, that's pretty exciting for all of us in the staffing business, especially when customers are turning to the flexible, contingent workforce to do so.

In our other brands, the truck driving brand is a smaller brand for us. It's one we've only owned a year, year and a half, and really owned it during the tough part of the cycle, but we're seeing nice pick-up there.

It's made up of two components, that business. One is temporary, just like our other temporary positions, and it struggled during 2009, the temporary business in the truck driver staffing. But they are showing growth now. And that's exciting.

So companies are calling on, I need a driver for a week, I need a driver for two weeks.

The other half of that business, which we are excited about, is more the dedicated part of the business, and that part of the business has been growing. It grows much like the other type of business, though. When someone chooses to switch, you get a big chunk of business.

And so, we've got some deals we're working on with potential clients in the truck driving space we are quite excited about. And this is a prospect for us over the next three years in this type of business, that this truck driving business will be very -- it will be high growth and profitable business for us.

In the PlaneTechs arena, they serve a couple of different avenues, also. One is this maintenance/repair/overhaul business, and it's been hurt substantial during 2009. It's where -- the airlines have grounded their oldest fleet, the fleet that needs repaired, and they just stopped flying them. Those are the planes they land out on the desert. Those are the planes that PlaneTechs folks were -- their customers were just getting ready to overhaul.

So as the airline business picks up, you should see the PlaneTechs business pick up rapidly, and as they add new lines back to the -- the airlines add new lines and new routes, they'll need to pull a plane off the desert, and guess what? That plane is going to need to be overhauled before it can start flying because they grounded the one that needed overhaul.

So we think that that business will grow rapidly when it does take off again, but it's still under pressure. PlaneTechs has some other growth avenues they are working on, and it's working well for them in those other growth avenues, but they're smaller, newer lines of business compared to the MRO business.

Okay, great. And then, with regards to the SG&A, obviously you've done a great job there in terms of managing that down. How should we think about it? You gave us good guidance for this coming quarter. Is that a level that should be kind of set a base and is there even more room for that to come down, or is that pretty much we've cut as much as we can cut and shouldn't expect it to come down anymore, but probably don't expect it to move up that much if revenue picks up?

I think that's a pretty fair way of looking at it, Mark. We've -- the rate of which we've taken SG&A out over the last years has really been a very unprecedented rate for us.

It's been an adjustment process, but our teams have adjusted well, the Company has adjusted well, and this new baseline that we are at is a new baseline that everyone has adjusted to quite well, and I think is a good base for us going forward.

With that said, we continue to look at this every month. So, every brand, every branch, all of them need to be able to produce sustainable profit over an entire economic cycle. And if that means closing a branch, consolidating a branch, we'll do it. If that means we've got to change the business model to take some more expense down, if we can't get the right amount of gross profit dollars out of it, we'll do that, too.

So, in answer to your question, we've taken the big chunks out, but we're watching this business close and willing to adapt it to whatever this next growth cycle hands us to make sure we are in a line with it.

Then the last question, then I will jump off. On the gross margin, I appreciate the guidance for Q1. Shouldn't we see maybe a little bit more than what's usual in terms of a sequential uptick, if you're getting hit as much by [Sudha]?

Well, we've tried -- it's very possible. Absolutely. As we go through this -- what I've given you is historical, sequential step-ups, and we're not giving guidance, annual, so I've been careful in choosing those words and just giving you history.

But we absolutely have expectations on passing through a good chunk of this Sudha increase, and that would create higher sequential steps.

Paul Ginocchio, Deutsche Bank.

Just a couple of small ones. Workers comp in the quarter, what was the percent of sales, and was there any write-backs?

Yes, let me give that to you, Paul. One second here. Work comp was 2.8% for the quarter, and you used the term write-backs. I think you are referring to reversal of prior-year reserves. And if so, that reversal was about 200 basis points.

Great. Thank you. That's it.

Clint Fendley, Davenport & Company.

I apologize if this has been asked. I joined the call late. But on the branch closures, you've continued to close plenty of branches in the quarter, and if I'm not mistaken, I thought you had intended to slow some of the closures back earlier last year. How are you thinking about the closures as you look out through 2010?

Well, when we hit about May of 2009, we had closed quite a few branches at that point in time. We were aggressive, as Derrek has mentioned, in both branch count and headcount reductions with the freefall of demand like we saw it at the tail end of 2008 and the beginning of 2009.

We kind of called a truce through the summer months and said, all right, we took a good shot at this. No, we didn't get every branch profitable, but we are heading into an up cycle. We felt things turning. We need to give this some time because it takes branches and employees to grow. And we didn't want to cut back too far if we came into the cycle where we saw it.

So we gave that some time, and the additional closures that we had this quarter were those that were just more on the continued train. By waiting, though, we closed the right branches. If we'd had just kept on the trend in May, June, we'd have just been closing for closure's sake.

So, there are branches that we are still working through to get profitable. We have high hopes for all of them. However, as Derrek just mentioned in his previous answer, we have high expectations for every branch. We measure and treat every branch as if it's our only branch, and those expectations remain true. And so, there are business plans, branch by branch, that those that run those branches have turned in and those that lead those branches follow up on.

And so, to take it further than that, we have high hopes they'll all turn to profitability, but if not, we will pull the trigger at the appropriate time to keep costs in line with where revenue is.

And it's hard to sort out where a customer will come on, and one customer can save a branch, if all of a sudden they order 50 workers, or you get something going, and you hate to close the wrong one and keep the wrong ones open. So, a little patience at this point in the cycle does us well.

Mark Marcon, Robert W. Baird & Company, Inc..

I wanted to talk a little bit about incremental margins. As we think about the core branches and the vast majority that aren't servicing this large account, it sounds like the incremental margins, at least initially, should be fairly high, shouldn't they? Somewhere on the order of 20%-ish.

Let me talk about incremental margins, and I'm going to talk about them in two perspectives. Talk about them over the short term -- short term being maybe a year, and then let's also take a step back and talk about the cycle and peak.

So over a year timeframe, we absolutely expect incremental margins of 20%-plus, and the shortest term, maybe a quarter, two, maybe three. They are going to be at their highest because that gross profit margin is going to drop down to the bottom line, and the variable SG&A will be trying to keep itself up. And we will also be taking a look on other cost matters to take and run this Company more efficiently.

So, I think your 20%-plus comment is right on the mark.

As far as longer term as we look out over the cycle, a 6% to 7% EBITDA margin is a very, very reasonable target for us to get back up to. We've been higher there at some points. We might be able to get up higher than 6% or 7%, but we're a different company than we were during the last peak, when this was exclusively, almost exclusively, the Labour Ready brand.

So, hopefully, those two markers give a couple of end points to measure incremental profit on.

I appreciate that. And then, can you talk a little bit about the -- in a worst-case scenario, if this large client rolls off, how should we think about the incremental profitability there and what adjustments you can make from a cost perspective there?

I think incremental profits on this customer, as well as any part of our business, we'll stick with the 20% marker, and that's a pretty good gauge. You know on a customer-by-customer basis, some are a little more, some are a little less, but that's a best approximation in thinking about our business in total and on an individual customer basis.

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

Thank you. We appreciate you being on the call with us today and your interest and your questions that you've asked today, and you can follow up with us with any further. Thank you.

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