TrueBlue Inc (TBI) 2010 Q1 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 2010 first quarter earnings 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 Steve Cooper, and CFO Derrek Gafford. They will be discussing TrueBlue's 2010 first 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 that 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.

Good afternoon. Thank you for joining us today to discuss our first quarter results, and our outlook for the second quarter of 2010. Today we reported a net loss of just over $2 million, or $0.05 per share for the first quarter, on revenue of $240 million.

The first quarter was a solid quarter operationally for us. Revenue came in at the high end of our earlier guidance, and our net loss was lower than expected. Our monthly revenue trends showed accelerated growth as the quarter proceeded. The improvement in revenue trends was widespread across nearly every geography and industry we serve, outside of construction. We are excited about the growth coming from both new and existing customers. It really feels we are in a classic recovery with light industrial leading the way.

I am pleased that while revenue met the high end of our expectations, our operating costs were lower than expected. This is a great combination to drive leverage in our business, and produce better than expected bottom-line results. Our expectations for the second quarter are for revenue to be in the range of $265 million to $275 million, with net income to be in the range of $0.03 to $0.08 per share.

Although the growth in revenue is widespread across many markets and industries in the US and Canada, it is particularly strong in manufacturing. The revenue momentum we experienced throughout the quarter has continued into April, and is reflected in our guidance issued today. Over the past couple quarters, we informed you of one large customer that we have been serving. In our 2009 10-K filed in February, we disclosed that that customer is Boeing and their affiliates. This is a great story for TrueBlue.

In late 2007, we acquired PlaneTechs, the nation's largest provider of aviation mechanics and technicians for the aircraft maintenance and manufacturing industries. At that time PlaneTechs was doing about $50 million in annual revenue with maintenance, overhaul and repair, or MRO as it is called, customers, and about $25 million in annual revenue with manufacturing customers, of which Boeing was one of those. In our 2009 10-K we disclosed that in 2009 13%, or $136 million of our revenue, came from Boeing and affiliates, compared to 5% or $70 million in 2008. Growing one account from $25 million to over $130 million was exciting for us, and a big change for TrueBlue. The PlaneTechs team has performed outstanding service for Boeing during this period of time.

The projects we have served Boeing with started in 2007, and that involved placing some supplemental mechanics to help out temporarily on a project to assist one of Boeing's affiliates, in preparation for the production of the 787 Dreamliner. With great success on that engagement, we were asked to help out supplement production mechanics and technicians in the beginning of full production. These engagements were entered into knowing that they would be somewhat temporary.

As 2008 proceeded we were asked to bring even more technicians to the production line, as Boeing was moving quickly to get the 787 into full production. As several planes had been manufactured by the beginning of 2009, we again entered into agreements with Boeing and their affiliates to supplement the workforce, doing warranty work and final detail changes to the planes that were being prepared to be put into operation.

The accumulation of all these various projects turned into a great year for PlaneTechs in 2009. We have also stated that we have not projected all of these revenue streams will continue indefinitely. However, it isn't easy to project exactly when each project will end, as our service level to Boeing has been outstanding, and we are viewed as an important partner in helping them succeed on getting the 787 into normalized production.

As our work becomes less project-based and a more normal part of production for Boeing, two things are happening. First, our project-based bill rates were higher than our normalized production bill rates. Recruiting is more difficult for short-term assignments, therefore the margins were higher on that type of work. Second, the number of specialized projects is ramping down on the 787, as it enters more normalized production, which will reduce the number of mechanics we place in these recovery-type projects. We do project we will be a long-term partner with Boeing in placing certified mechanics into normalized production roles that are not in conflict with the union. Projecting that more normalized run rate for our Boeing services has not been easy, as a number of special projects do continue to require our services.

What I can conclude is our PlaneTechs team has found a great partner, and shown that they have the ability to service this customer at a high level, as shown by the extended nature of our assignment with them. Our revenue in the first quarter of 2010 with Boeing remained consistent with Q4 of 2009. Lower gross margins on this revenue, though, resulted in our overall Company gross margins to decline by almost 1 full percentage point in the first quarter.

Our Q2 forecasted revenue and income that was issued today includes Boeing's revenue to be about 8% of revenue, as more of the special projects end, and it also includes further erosion of the gross margins on this account, as the remaining revenue is more normalized production, with margins closer to more standard light industrial margins. All-in-all we are pleased with the opportunity to serve Boeing and their affiliates. Our PlaneTechs team is to be commended for their outstanding service. It appears we will get the opportunity to continue to serve Boeing on a longer term basis, filling more normalized production, along with being ready and available to serve any further project work that is needed in the future.

Along our other lines of business we are seeing a continued increase in demand in manufacturing. It appears firms are turning to flexible staffing at higher than historical rates. As we have stated in the past, we believe 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 have also seen throughout time that once they have stabilized their own cost structures, they turn to flexible staffing quickly, and demand can be explosive. Currently we are experiencing the stage of the cycle that demand is growing.

It has been projected that the penetration rate of flexible staffing to permanent staffing will increase to even higher levels than the previous peak, as a result of businesses looking for more methods to remain agile in their business models. Our results definitely reflect the dynamics of the cycle, as in March of 2010 our same branch revenue grew 15%. We are seeing that 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 a third shift and weekend work shifts, as well as fill-in positions to supplement their normal operations.

As their orders continue to ramp up they need to ramp their production units up 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 manufacturing business grew by over 30% in the first quarter, even when we exclude Boeing from the manufacturing numbers, and the growth in April of 2010 has continued.

Our construction business continues to struggle. The rate of decline in 2009 was in excess of 30%, and that rate of decline continued into the first quarter of 2010. Our construction business in 2006 was approximately 40% of our mix. In 2009, it fell below 25% of our total mix. And in 2010 it is approaching 20% of our total business mix. New building permits continued to decline throughout 2009. However, in early 2010 it appears that trend is reversing, and building permits are in the early stages of recovery. This is an exciting development for us, to see the construction market get revitalized.

We continue to have full capabilities to service the construction industry in residential and commercial construction. 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. Even with the drag construction has had on Labor Ready, we are showing strong signs of producing double-digit growth in that brand in the second quarter.

Our CLP 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 part of the cycle. To diversify our business mix at CLP, we have been focused on industrial and institutional customers, along with focusing on remodels in residential and commercial construction. This focus has provided us with an avenue to stabilize that business, while new construction isn't providing an opportunity to grow currently.

California, Texas and Florida, three large revenue states for us, have all shown stabilization at the end of the first quarter. Our Northwest operations in areas like Washington, Oregon, Idaho, Montana, and Utah, were the last to experience the downturn, and seem to be the last to stabilize also. This past recessionary cycle resulted in the largest dropoff in demand in the history of the staffing industry. Our response to the significant drop in revenue throughout 2008 and 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 head count from about 4,000, to our current count of approximately 2,500.

Excluding the acquisition-related operating costs added in 2008, we have taken nearly $100 million out of core annual operating costs during those two years. And 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.

This is the exciting part of the cycle as our business model produces strong operating leverage. 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 each employee have the capacity to handle more revenue. Our current per office annual 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 as much as 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.

And just as we experienced significant operating leverage after the last recession, we are confident we should experience this during the current recovery. And we believe we should once again be the first to see it and enjoy that strong, bottom-line impact with any pickup on the top line. We remain positive about the opportunities in the blue-collar staffing sector as the recovery takes hold. We believe we are well-equipped to serve these markets and customers, and we believe our customers will continue to be the first to grow in an improving economy.

We have the ability to quickly expand our regional truck driver and light industrial staffing brands, as we see the opportunity to serve customers in extended markets, 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.

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. We are proud of our response to the tough economic downturn, and our many employees that have each done their part in making us a stronger company, and prepared to prosper in a recovery.

That preparation is now paying dividends as our extensive sales and customer service training conducted over the past three years is paying off in our current performance. 2010 brings excitement throughout 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. 2010 has brought a new set of challenges with rising employment costs, such as the minimum wage increases we saw in 2008 and 2009, and now rising unemployment taxes. The increase in unemployment taxes has been a challenge for us so far in 2010. During Q1 we experienced declines in our gross margins, as a result of the increased unemployment taxes.

Our response during the quarter has been fantastic by our leaders and our branch staff. We have most recently seen traction in getting these cost increases priced into our business, and believe that we can now fully pass through these increases as we work through 2010. I am appreciative to our dedicated employees that have worked with our customers in getting the SUTA increases understood.

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

Thanks, Steve. I will provide some supporting background on Steve's commentary starting with revenue. Due to the amount of positive revenue momentum we have experienced over the last two quarters, I am going to provide some expanded highlights on our trends. During my conversation, any reference I make to revenue growth or decline is based on the same period a year ago unless stated otherwise. First, while total revenue grew 7% this quarter, keep in mind it is net of a negative 5 percentage points of decline related to branches we decided to close over the last 12 months.

Now let's focus on the quarterly trends in our ongoing business and cover same branch revenue trends by focusing on two areas, one, the year-over-year improvement we have experienced by quarter, and two, the trajectory of the year-over-year improvement between Q4 2009 and Q1 2010. So get your pencils ready. Here come some statistics. Q1 2010 same branch revenue grew by 12%. Q4 2009 same branch revenue declined by 6%. The trajectory of improvement measured by the sequential year-over-year improvement between Q1 2010 and Q4 2009 represents about 18 percentage points.

Now here are those same statistics excluding the revenue of our largest customer, Boeing. Q1 2010 same branch revenue grew by 3%. Q4 2009 same branch revenue declined by 17%. Thus, the trajectory of improvement represents about 20 percentage points. Our monthly same branch revenue this quarter also experienced accelerating momentum with January growing at 5%, and March growing at 15%. And just like our quarterly trends, the trajectory of this improvement was not positively impacted by our largest customer.

For the second quarter of 2010, we expect revenue in the range of $265 million to $275 million, which is an increase over the same quarter a year ago of about 9%. Our revenue expectation includes a step-down in the quarterly run rate of revenue from our largest customer, Boeing, of about $15 million. Excluding the step-down, our expected revenue growth for Q2 would have been about 15%.

Now let me provide some background on gross margin. Our gross margin for the quarter was 25.5%, as expected, which represents a decrease of 240 basis points from the same period a year ago. The 240 basis-point decrease was the result of increased state unemployment taxes, an increase in the mix of light industrial and large customer work, and a price reduction given to our largest customer. Each of these three items contributed 70 to 90 basis points towards the 240 basis points of the total drop in gross margin.

Let me give some background on the current gross margin climate from our perspective. The annual cost of increased state unemployment taxes, assuming no action on our part, represents about 100 basis points of gross margin this year. While we got off to a slow start in Q1, we are now making good progress. Our teams are very aware that there is a certain window of opportunity to pass through these costs as the staffing industry rebounds, and that time is now. While competitive pricing pressure still exists, it has moderated in comparison with a year ago.

Looking to Q2 of 2010, we expect gross margin of about 26.2% to 26.4%, which is an increase on a sequential basis from Q1 2010 of about 80 basis points. The 80 basis-point increase includes about 50 basis points, largely due to seasonal build from higher gross margin end markets, and about 30 basis points of gross margin improvement from pricing pass through of state unemployment taxes. We expect to make similar SUTA progress in Q3 and Q4 of this year.

Let me add some comments on sales, general, and administrative expense. SG&A was $61 million this quarter, which represents a decrease of $7 million, or 10% compared to the same period a year ago. The decrease in SG&A is the result of widespread cost control actions taken last year within our branch network, field management, and support centers. SG&A as a percentage of revenue was 25.5%, which was lower than our expectation of 26.5%. The better than expected result is attributed to the operating leverage from higher than expected revenue, while maintaining our cost structure. For the second quarter of 2010, we expect SG&A to be about 23.5% of revenue based on today's revenue estimate.

Now with some of the quarterly information off the plate, let's talk about how our operating leverage works. As we increase same branch revenue, we are able to leverage the large cost component of our fixed cost component of our SG&A from branches, field management, and support costs, to produce increasing operating margins. From a mathematical perspective, the variable rate of SG&A on same branch revenue is about 6% to 7% of revenue. The net impact of our gross margin and variable SG&A is an incremental operating margin on additional same branch revenue of about 20%.

This is a very metric-driven company, and decision making here is about return on investment. Every brand, every geographic region, and every branch needs to be sustainably profitable, or we will make changes. Likewise every support function needs to be contributing to sustaining profitability in a meaningful way. We have a proven and disciplined ROI approach to decision making, which we will continue to use in running the business. Before wrapping up let me address a few housekeeping items.

For depreciation and amortization this quarter's expense is a good estimate for future quarters. For CapEx we expect to spend between $1 million to $2 million a quarter this year. We expect an annual income tax rate this year of about 40% to 45%. And lastly, let me address our fiscal year. This is a 53-week year for us, which results in a 14-week quarter, fourth quarter. While the extra week will add approximately 1% to our revenue this year, it is our lowest revenue week of the year, as it is the week after Christmas and includes New Year's Eve. Consequently we do not expect it to make a positive impact to our profitability this year.

Now we can open the call for questions.

(Operator Instructions). The first question comes from the line of Mr. Paul Ginocchio with Deutsche Bank. Please proceed.

Yes, thank you for taking my questions. Appreciate the color on the step-down in the Boeing revenues. Can you give us any color what the year-on-year decline is, besides the 15 million? And while you are looking for that, just a few more quick questions. You talked about construction and maybe a pickup. Are you actually seeing an improvement now, or are you just hoping to see that, based on some of the macro data?

Yes, I was more commenting about the fact that we have seen building permits actually return to a growth period, and that is the best leading indicator we can see for new projects coming on. So with that returning to a growth, that is nice. But no, through the first quarter construction still declined at over 30%.

But you are thinking the second quarter is flat, or not making that prediction?

Yes, I am not making that forecast (multiple) forecast. The trends are baked into the forecast that we have given overall. We are not looking at construction being our major driver in 2010.

So in my prepared remarks, Paul, I talked about Boeing's revenue last year of being about $70 million during 2008, and $130 million-plus in 2009. With that ramping up towards the end of the year, we finished Q4 at about $39 million, I think in Q4 revenue of 2009. And this quarter was about $37 million.

That is helpful.

Yes. So if you go back to the first part of last year, as Derrek talked about $15 million coming out of that run rate of $37 million, so that is $22 million a year ago first quarter 2009. Do you have that number there?

2009, it was closer -- the actual number for 2009? It was $18 million.

Yes. So it is a little bit of growth still, Paul. Not much. It is getting really back to almost comps.

Okay. Thanks very much.

And the next question comes from the line of Mr. Jim Janesky with Stifel Nicolaus. Please proceed.

Good afternoon. A couple questions. Are you seeing any changes currently? You touched upon your transportation business. But we have been hearing that there is potentially a shortage of drivers as we moved into early 2010. Have you experienced any growth there?

Well, our driver business is made up of two components, Jim. One is more dedicated drivers where we help manage the fleet of drivers for companies. And the other is the temporary driver. And during 2009, the temporary driver side of the business was shrinking while the dedicated was growing. And as we enter 2010 we have seen that balance come around good.

In the dedicated position you are really going after competitive positions, either taking it away from another company, or helping an organization see how having us help manage the compliance of that driver is good. The temporary is the best proxy of is transportation growing or shrinking. We have actually gotten back to a point where our temporary driver business is starting to show some good performance.

Okay. How about shifting gears to same branch? What does it look like in the first couple weeks of April?

Well, we are not going to give the exact number. But I gave you 15% for March, and then I said those trends are continuing. So that is about where we are. That is similar to what we have said in previous quarters. It is hard, Jim, because we don't want to get into trying to explain holidays to you. We had Easter and Good Friday in those first two weeks, and we just trip all over ourselves trying to explain two weeks out of a longer quarter. I think it is best just to know where we came off at the trend at the end of March.

And Derrek, gross margin trends, I mean, obviously September is your -- has historically been the best seasonal quarter from a revenue perspective. But there are some headwinds and some tailwinds to gross margins right now. Should we expect the same type of 100 basis-point sequential improvement as the year progresses?

Well, we have given you Q2, what our estimate is there. And we have also talked about what our expectations are going to be as far as passing on SUTA. So we expect to get another 30 basis points of SUTA pass through every quarter here, until we get all of this passed through. That is about as far as I can go in giving more gross margin guidance. We are not going out any further than Q2, other than talking about we are committed to getting 100% of the SUTA costs passed through.

Okay. And just on SG&A, do you feel as if that you have made some pretty permanent changes to the SG&A line that we could expect cycle to cycle that SG&A might be lower?

Oh, absolutely. Because we have had structural changes in the size of our branch operations. Cutting 200 branches back and the leadership team that supports those branches, those are permanent cuts. The support side of the business was also resized. And then we took some significant steps in consolidating back office support from each of our brands. Those are all permanent changes in the business.

As revenue grows, Derrek has laid out a pretty good model for you to follow, as far as how much variable costs will come through. There will be growth in fixed costs, though, that somewhat use inflation as a proxy, but we should see our bill rate grow at those rates too, to provide for that opportunity. So I am not going to say it holds forever, Jim, but structurally those things are gone, those people are gone, those branches are closed, and those systems and processes have been consolidated.

I might just throw in the back of that, we feel that our branch network right now has got a good amount of capacity to absorb this revenue increase that we have got, as well as what can unfold the rest of the year. I mean, our branches are ready for this. The team has adjusted to a new baseline in our expense structure. We are feeling pretty good with what we have got right now, to be able to run through the rest of this year pretty strong.

Okay, great, thank you.

And the next question comes from the line of Mr. Kevin McVeigh with Macquarie. Please proceed.

Great. Hey. Thanks. Nice job on the quarter. I wonder if you could help us understand what parts of the business are really picking up given the runoff in the Boeing contract. The revenue guidance looked really strong, particularly given that construction is still relatively listless. If you could just show that a little bit on some of the other areas.

Yes. It is a great question. Manufacturing is really, really picking up. And our Spartan brand that includes some of our older Spartan branches in Florida and the Southeast, and then we merged them with the PMI acquisition that we did two years ago, that group of branches is performing very nice for us.

As I mentioned, Q1 manufacturing overall grew 30%, which continues to even show great traction through the holidays and into April. I think you have heard from other people in the industry that they have seen similar results. And we are seeing lots of signs within manufacturing that tell us that the fundamentals have changed over time and manufacturing is going up, the work week is going up, and fundamental things that say, boy, these are strong indicators that the cycle is well underway for manufacturing. So that is driving the Spartan numbers. It is driving a big percentage of the Labor Ready numbers.

We have retooled a lot of our CLP, which is our construction business, our older residential and commercial construction business. And we have retooled and focused those sales and service teams on signing what we call industrial accounts. And industrial accounts are -- they are retooling manufacturing facilities. They are building out power facilities. And whether that be the green power, or just retooling an old power plant, that is growing nicely. So there are lots of things in that category that are supplementing residential and commercial construction right now. And supplementing the fact that the Boeing work is ramping down. So it is working nicely for us right now.

That is helpful. Steve, you kind of talked about the centralized recruiting model. In terms of percentage of revenue, where can that go to? And what I mean is, how many jobs can you fill through that model kind of near-term, and where does that go long-term? Because I'd imagine that is going to help from a margin perspective as we work through the current cycle.

Yes. Most of the PlaneTechs business was -- well, all of it is done on a centralized recruiting and dispatch model. So that got us curious of seeing these more skilled positions at CLP, welders, pipe fitters, electricians, especially those that are servicing -- putting up solar equipment, or windmills in particular, we have some large accounts there that are growing nicely. And so we transferred that knowledge and that process and skill set over to CLP, on how to do centralized recruiting and dispatch. So we have hundreds of workers now being dispatched where there is not a branch within 500 miles of the work site. And just proving it out is exciting.

Now your question more, is where are you headed with this? And it is hard to answer that, Kevin. Because we get pretty excited about saying, well, what other costs could be taken out of our business with this knowledge? And I am not going to jump there today, but I can tell you that is being investigated heavily, of how close do we need branches, especially when it comes to more skilled jobs? What is the purpose of the bricks and mortar in our business? And that is all being challenged, as we learn more and find that we can do it, and we are successful.

With knowledge gained and skills obtained, where else might we take this and how big that market might be, I don't have my hands around that. All I know is I am really encouraged, and it is all incremental to what we have done in our past. And that is exciting.

That is helpful. If I could just ask one more, and I will get back in the queue. How have workers' comp trends been trending at this point in the cycle relative to prior cycles, from an incident perspective?

On our work comp run rate, we have not seen any jump in our work comp run rate. We have continued to lower accident trends. There are a lot of schools of thought on what happened in run rates on work comp. We haven't seen any spikes there. We have received beneficial credits related to some reserves in prior years over time. But related to the run rate for claims that are happening now, we are not seeing any alarming spikes in any particular area.

Great. Thank you very much.

And the next question comes from the line of Sara Gubins with Bank of America. Please proceed.

Hi, thanks. Good afternoon. Could you talk a bit about the trends that you are seeing by size of client?

Yes. When the recovery first started, and I am going to say we saw positive signs we talked about in Q4, but really at the beginning of Q1. Let me go back even further. Large accounts held us up in 2009,and our smaller accounts struggled. As we move into 2010, though, we are seeing our smaller account improving. We are seeing the work done -- the onesey, twosey business done on a branch location improving. So that trend has changed significantly the last -- I would even say the last 10 weeks, Sara, that the local-level business, the onesey, twosey business is showing equal signs of improvement as large accounts are.

Okay. And then any discussion internally about restarting your share buyback plan?

Well, it is fun to get that question. I can tell you that. And it is fun to bring that question up with my Board, saying our confidence of producing free cash is growing. Let's look at the projections, and let's look at the uses of capital. And so your question is as timely as ours is internally.

And I think you just have to go off of past experience with us, and say how did they use capital during the last cycle? And it wasn't exactly a 50/50 split, but there were two uses. One was share repurchase, and one was buying companies. We have spoken on this call that of at this point in the cycle, buying companies hasn't been extremely attractive. The valuations are hard to come across for, of smaller companies, those that survived, I think their ownership structure, whether it be private equity or families that own them, are all wanting to clean up the business before they put them back to sell. And we are not one to chase pricing. So that would lend our hand towards, unless that environment changes we would be more in the share repurchase camp. But we surely haven't come out with policy, or any guidance on where we might be.

Okay. And then last question for Derrek. I am just wondering about the tax rate that you got into for the year, it is a bit higher than the last couple of years. What is influencing that?

It is all about the level of profitability. So if we were at more of a mid-cycle earning stream, we would be looking at a tax rate of 38% to 40%. I think because you have listened to a lot of people try to predict this tax rate on lower income levels, it is -- one, it is volatile. Number two, there is a certain amount of expense in your tax rate that is fixed in nature. So that is what is pushing it up.

Great. Thanks very much.

And the next question comes from the line of Mr. Mark Marcon with R.W. Baird. Please proceed.

Good afternoon. I was wondering if you would talk a little bit about what you are seeing in terms of the pricing trends, particularly with the small clients as they start coming on?

Well, as in past parts of the cycle, Mark, the smaller account provides stronger gross margins. So they are new accounts, usually. It is somebody with a small project or a new sell. So it does a couple things for you. Number one, since it is going to be shorter term in nature, placing two people, you get higher margins for that. Since it is a new sell you have the opportunity to price in SUTA.

And those trends should -- if that growth structure pushes us up the later part of the year, the gross margins should improve with it. Those historically and currently are higher margin accounts. So that is exciting stuff also, to see the basic retail business come back with those characteristics.

Absolutely. And then shifting back to the major accounts, can you talk on two fronts -- one Boeing, really good guidance for at least the coming quarter. How do you see that unfolding? And then two, can you talk a little bit about the experiences that you have gained from Boeing and how that can help you gain? Or what are you seeing in terms of potential to gain other big accounts that could be material over time?

Okay. Well, I went into quite a bit of depth on our thoughts of where this Boeing revenue came from and where it is going. And hopefully that gave you all a little more color on why we had so much uncertainty around it over the last couple quarters. Even though it was a large number growing, it was made up of several projects within Boeing. It wasn't just one source. And so we had to -- it was hard for us to forecast when each one of those projects would ramp down. We have more insight to that now. The numbers that we have guided for Q2 seem very, very predictable. Q3 still somewhat is less, but we have taken most of the uncertainty off the table of Boeing I think in our Q2 numbers, both for the margin squeeze that comes on, because of the lower pricing, and the type of revenue that is projected in Q2 is more sustainable.

So that Q2 revenue is relatively sustainable?

It is more sustainable than when we were on this call at the end of Q3 and Q4 of last year. Because that was still ramping, it was still exciting and a little bit chaotic, and it was representing several projects. It is narrowing, and we don't have as many projects producing the revenue anymore. And so it is easier for us to see what we are hanging onto.

At the same time we have had some great success with talking to Boeing about being a longer sustainable part of their production staffing. And we feel strongly that we are going to have that opportunity. So my estimation, we did lay a lot of uncertainty on it in our Q4 call. And I believe at the end of this Q1 call, the bulk of that uncertainty should be reduced for you.

Great. Then can you talk about the other opportunities?

Yes. So what did we learn here? A couple of things. One, the support team, both legal/finance and the structural people that support such a large account, have had our eyes opened on dealing with this large of an account. So those have been great learnings. Our confidence has grown. I believe we have a lot to celebrate from those learnings.

But most importantly it is about your sales team, and the service team, and what have they learned, and what can they do with it? And this has given us a great resume, to go out and work and grow our other manufacturing opportunities within the aviation business. And there are a handful of accounts that we have called on, and we are showing them our abilities to recruit and the success that we have had.

And we have great, great references with Boeing. And it is not just one person. We succeeded on several fronts at Boeing. And so our reference database of people we succeeded, which keep in mind that means they succeeded in their job, they remember it, and they will give us a good reference. Those are all great things.

Good to hear. Thank you.

And the next question comes from the line of Mr. Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much. Mostly just a few numbers questions. In the press release you stated you closed seven branches in the quarter. Just in trying to do the branch count from the end of last year to now, I am one short. Did you open up a branch in the quarter?

Yes. We had one opening. Not a physical location, it is more of a centralized dispatch that is a profit unit for us for a customer. But we did have one, but it wasn't a physical structure.

Are there any more plans to close any branches throughout the remainder of the year?

I think we have been kind of cleaning up and making the right decisions on a month by month basis, Jeff, but there is not a big overhang here that we have got that we are looking at. You can see as you look at our branch closings each quarter they have been ramping down. And I would expect them to stay there unless we have some branches that just can't get things turned with this industry bouncing up.

Okay, great. And forgive me if you stated this. I might have missed it. Did you give changes year-over-year on billing rate and pay rate for the quarter?

No, we haven't. We have kind of broken down the gross margin into some different components. We've stayed away from bill and pay rate and inflation metrics just because of in our PlaneTechs business, in the centralized dispatch that we are doing, we have got per diems involved that are included in bill rates. And I think just distorts some of the traditional bill and pay rate trends that some folks use. So we haven't been giving that.

Okay. Fair enough. Moving on to gross margins, or actually just stepping back a second, did you give workers' comp expense as a percentage of revenues?

I didn't. But I can give that to you.

I appreciate that. And if you could also tell us if there were any reversals of prior accruals?

So work comp for the quarter was 3.3%. And there was a reversal which represented 1.7% of revenue.

Okay, great. And then just one quick more numbers question. For the second quarter guidance, what kind of share count are you using?

Well, if you take a look at our income statement, we have noted what the anti-dilutive effect is of some of our equity instruments. So you need to add that back in, because we are guiding to a profit. And then generally that builds somewhere around 100,000 or 150,000 a quarter is generally what the run rate is.

Okay. Great. And Steve, I didn't forget about you, so let me ask you one as well. I think you mentioned in your remarks that the pricing pressure has gotten a little bit less worse compared to last year. I am just wondering about the competitive environment overall. I know in prior expansions we did see the entrance of some new competitors into this market. Are you seeing any signs of that yet?

Well, thanks for thinking about me, Jeff. I appreciate that. But the competitive front has been interesting. There have been lots of people leave during '09. And the pricing pressure was stiff the last two or three quarters. We did feel a little bit of movement in that pressure, in that environment. I think some of it came from the smaller retail accounts starting to come back, that we have the ability to increase prices on that front a little bit better than the large account. So that has been better.

Now you also alluded to entrance of new competitors and what that might seem. That is part of this staffing industry, that barriers to entry on the front end of an economic cycle are fairly low on a localized basis. It does take capital though, and this last downturn shook quite a few people up that thought this was an easy industry. So I think it is going to be a little bit slower than a normal cycle.

Yet we can't put our heads in the sand at the same time, and realize that the barriers to enter on a localized basis are still pretty low in this industry. We haven't felt it hard at this point in time. We are pleased with being able to compete against both local players and national players, in both competitive bids and service levels. So we don't have a fear building around that, but reality speaks to your question very well.

Okay. Appreciate the color. Thanks so much.

And the next question comes from the line of Mr. Clint Fendley with Davenport. Please proceed.

Thank you. Good afternoon, guys. Steve, a question, there has been obviously a tremendous amount of activity in the industrial area to replenish inventories. I mean, any possibility of a lull in here, maybe as inventories are replenished say before the consumer demand has normalized?

Gosh, that is a couple steps ahead of my ability to project and predict what the consumer is going to do, and all of that. I can tell you that the demand feels real. It doesn't feel like our clients are replenishing. It feels like they are just general movement. I think one of the things that is causing a little bit of -- there is a little bit of secular move here, not just cyclical, and that companies are turning more to flexible staffing. That is causing some growth in our industry. So yes, we are all talking about how great manufacturing growth is right now.

And your question, is it sustainable. You are going to have to go to the economists to figure all that one out. All I know is the current demand is real. It is not like, can I have these workers for a week or a month. They are bringing them on, and we are negotiating long-term situations.

Got it. Thanks. A question for you, Derrek. I wondered if you could help us, what is the difference in the incremental margins as you look across the various business units?

Well, since we don't segment report, Clint, we just give this as an average. And it is not perfect amongst each one of the segments. But realistically this 20% incremental operating margin, it is pretty close for most of the brands that we carry. It gets impacted from time to time based on scale, or maybe a large customer in a given brand. But by and large, this 20% incremental operating profit, it is real, it is part of our model. It always has been. And it still continues hold up well as an approximation of what the bottom-line will do, as we bring on more revenue through our branch network.

So the centralized nature of PlaneTechs hasn't provided really for a materially different number than the 20% on average?

Not so much. I mean, they have per diems and things that are included. We could work through the metrics, maybe more of the details on how it works, but it is running through revenue, it is running through their costs. The margins are a little bit lower but the SG&A load is much lower than this general average I have given you. So again it pencils out pretty close to our overall average.

Great. Thank you guys.

(Operator Instructions). The next question comes from the line of Mr. T.C. Robillard with Signal Hill Capital Group. Please proceed.

Great. Thank you. Good evening, guys. I just wanted to just get a little more color around -- just to make sure I am understanding this correctly. I appreciate all the granularity you have given around Boeing. I just want to make sure I understand this. Is this all around the Dreamliner project?

Yes.

Okay. And am I understanding correctly, there is work that you are doing that will continue when this goes into a full-on production, when it gets out of the specialty production?

Yes. Part of the projects that we were on was really helping the main line production facility get ramped up and get some planes moving through it. So we are already skilled, and have experience in that one plant down in South Carolina. So the relationships are in place. Our people are in place.

I had mentioned as this moves from a project-based gross margin markup to a more of a normalized operation, we have baked those into our new gross margins. So we had to take a little squeeze there. But it feels more permanent so it is worth it, right? And that is kind of the difference in pricing our project-based business and our normalized operations business. But that is what gives us the confidence, and we have been in negotiations with them.

We have been at the table on how -- what help they need and what our people are doing, and how we will play a role. As they really ramp up production, now they have got the bugs worked out. We still have a little bit of revenue that we are doing on projects outside of that one facility. But they are ramping down, and they become less needed as there is less warranty work and repair work and final tweaking, that kind of stuff.

But this is a whole new era for us. We have proved ourselves at Boeing. So will we expand beyond the 787? That is the big question. And how will we work alongside of them in their more unionized locations? And to be fair, the relationships are there and they have seen how the service works. And their eyes have been opened to a whole new set of staffing needs that no one was filling. And we are pretty proud of our team for opening the eyes and making it happen.

Okay. That is great. Thank you. And there are just a couple of clarifications. When you talked about the 30 basis point improvements for pricing around SUTA in the back half of the year, was that 30 basis points sequential improvement in gross margin that you were talking about for third and fourth quarter?

Yes, it is.

Okay. Great. Thanks. And just another clarification. When you had given the three items that were impacting gross margin, you said, I believe, it was like 70 to 90 basis point impact. I am assuming that was 70 to 90 basis points for each of those three?

Yes. What I was talking about was quarter-over-quarter, so Q1 this year compared to Q1 last year, I gave you three items that were really driving that decrease predominantly. It is unemployment taxes that increased there, the change in mix in our end markets towards more light industrial and large customer work, and then some pricing concession to our largest customer, Boeing. So each one of those three representing somewhere around 70 to 90 basis points. Call it 80 down the middle. Add that up, and that gets you to your 240 basis points approximately.

Okay. Great. Thank you. And with respect to your comments around having some good capacity left on a branch level, when you were referring to the incremental margins, and again thanks for giving us the calculation there, could you just give us a sense -- and I know this isn't linear; I know it is going to be very kind of a big picture average, so that each branch is going to be different -- but how much capacity do you have from a revenue per branch basis, before you start to see a material need to adjust your fixed cost basis?

Well, if we are talking about fixed costs at the branch level, that 5% to 7% encapsulates a lot of the costs. These are branches that are running $1 million, a little more than $1 million each. If we are talking about a Labor Ready branch, they have capacity to go up to $2.5 million, before they kind of start running out of room to get the flow through of the workers there. Our other brands can oftentimes go up to $3 million, $4 million a branch.

So the fixed cost at the branch level still remains pretty stable. This 5% to 7% I think is a good proxy. Certainly at some point in time if we ramp these things up to $1.5 million, we might have to add some more support in some different areas that would throw off some of our fixed costs. But we are talking a ways down the road here.

Okay, great. That is very helpful. And that actually dovetails into my last question, which is if you look at what has gone on with the expense control, and (inaudible) comments about how you have made permanent changes to the cost structure, how should we think about peak to peak margin improvement for you guys going through the next cycle? I know that is a long way down the road, but obviously there has been some very material structural changes to your model. It would seem that there should be material improvement in terms of peak to peak margin potential.

Well, I will start off here. It is always hard to say what the economy is going to do over the next term. But we like the network of branches that we have got. We like the bench strength of the people we have got. This model works and it works well as we add more revenue. So as we talk amongst ourselves, a 6% to 7% operating margin at the peak of the next cycle does not seem anywhere out of the question for us.

Okay. Great. Thanks so much, guys.

And the next question comes from the line of Mr. Paul Ginocchio with Deutsche Bank. Please proceed.

The SG&A, now it looks like it is up a little bit year-on-year at 3.3%. Should we read anything into that? Are the sort of risk management programs, have they run out? Or is it just some underlying increase in workers' comp incidents? Thanks.

Sure. Just to clarify, Paul, the first part of your question started off with SG&A and the last part was work comp. I think you were referring to just work comp (multiple speakers) revenue?

Right. Right.

No. I think, I mean, if we are taking a look back at last year, we had a couple of quarters where we were under 3%. And we just had some large credits coming back those quarters. I don't think those were, nor did we ever consider those to be an ongoing run rate of under 3%. So this is getting a little bit closer to what would -- a little bit more normalized work comp rate.

Okay. Great. Thank you.

Ladies and gentlemen, this concludes the question and answer session for today's call. I would now like to turn the call over to Mr. Steve Cooper for any closing remarks.

I would just like to thank everybody for being on the call today, and for your questions and respect for Derrek and my time, and thank you for your time here today. And we will talk soon. Thank you.

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