TrueBlue Inc (TBI) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the TrueBlue 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 2010 second 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 today you. At this time I would like to hand the call over to Miss Stacey Burke for the reading of the Safe Harbor. Please go ahead, Ms. Burke.

Thank you. Here with me today is TrueBlue CEO and President Steve Cooper and CFO Derrek Gafford. They will be discussing TrueBlue's 2010 second 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 Web site, 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 accompanied filings with the Securities & Exchange Commission, including our most recent forms 10-Q and 10-K. I'll now hand this call over to Steve Cooper.

Thank you. And thank you for joining us today to discuss our second quarter results and our outlook for the third quarter of 2010. Today we reported net income of $7.9 million, or $0.18 per share for the second quarter on the revenue of $285 million.

The second quarter was a solid operationally for us. Revenue beat our own estimate by 6%. And our operating costs were 2% lower than we had expected. The combination of these two items drove strong operating leverage, and net income per share of $0.18, which was $0.07 above our high-end guidance, excluding a favorable tax development of a prior period tax matter which we received this quarter.

The stronger than expected revenue growth during Q2 was primarily driven by same-branch revenue growth across most geographies and industries other than construction. Excluding the impact of our work with Boeing, our largest customer, our same-branch revenue grew at approximately 20% evenly throughout the quarter. Derrek will provide additional background on our same branch revenue trends.

Our quarterly revenue from Boeing was about $28 million in Q-2. And we are expecting Boeing quarterly revenue in Q-3 of about $20 million, which is a decline from our peak Boeing quarterly revenue of $45 million in Q3 last year. We estimate our quarterly revenue from this account will stabilize around this amount in the third quarter.

Over this past year, we have kept you informed of the impact of this project with Boeing. We estimate the large anticipated fall-off in revenue from Boeing has mostly occurred as of Q3, and are pleased our core operations are growing, the combination of which in our view diminishes the overhang impact to revenue.

The PlaneTechs team has performed outstanding service for Boeing. The projects we have served Boeing on started in 2007, with placing some supplemental mechanics to help out temporarily in preparation for the production of the 787. Since that time we have served them on various other projects, and believe with our great track record of success with them, we will prove to be a good long-term partner. We believe this will be a source of additional revenue from time to time above the base services discussed earlier, both with Boeing and others in the aerospace, manufacturing and military industries.

Our expectations for the third quarter are for revenue to be in the range of $295 million to $305 million, with net income to be in the range of $0.15 to $0.20 per share. Although the growth in revenue is widespread across most markets and industries, it continues to be particularly strong in manufacturing, where we saw over a 50% increase in revenue this quarter. Most other industries served, besides construction, grew in the mid 20% range.

Although our construction business is not contributing to our strong growth rates, it has shown signs of stabilization. Our residential construction business was primarily flat, compared to a year ago, with commercial construction down approximately 10%. We have been expanding our ability to serve industrial construction projects by placing electricians, welders, and pipe fitters into the building, renovation and remodel of power facilities and manufacturing facilities. During Q2 of 2010, we provided hundreds of skilled workers on plant maintenance and shutdown projects along with new projects in the windmill and solar energy fields. This is a growing segment for us and is exciting.

California, Texas, and Florida, three large revenue states for us, have all experienced growth this quarter. Our Northwest operations in Washington, Oregon, Idaho, Montana and Utah were the last to experience the downturn, and seem to be the last to stabilize, and are still struggling to find growth but are most recently showing improvement.

We remain positive about the opportunities in the blue-collar staffing sector. We believe we are well-equipped to serve these markets and customers, as these customers have been the first to grow following a deep recession. With our niche approach in the industry with specialized recruiters and customer service teams, we have shown we understand the unique needs of our customers. We have continued to invest during the downturn in sales and service training, which has increased the quality of our teams and improved the tenure in our employee base that serves these customers' needs.

During Q1, we experienced declines in our gross margins. Our response during the year has been fantastic by our leaders and branch staff. We have seen traction in improving our margins. We improved our gross margins in Q2 by approximately 100 basis points compared to Q1 and we plan to improve our gross margins by approximately an additional 100 basis points in Q3 as compared to Q2, which will bring Q-3 in approximately 200 basis points above Q-1. That is significant movement in a short period of time.

Businesses are turning to flexible staffing to fill a larger percentage of their workforce. 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 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 strong.

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 methods to remain agile in their business models. With stronger revenue growth rates, improving gross margins, and operating costs being controlled tightly, we believe the operating leverage in our business model will continue to be strong.

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

Thanks, Steve.

I'll provide some further discussion of our operating trends, starting with revenue. During this conversation, any reference I make to revenue growth or decline is based on a comparison to the same period a year ago, unless stated otherwise. Total revenue growth this quarter was 15%, and same-branch revenue growth was 17%.

It's important to invest some time discussing our monthly growth rates, as there are some unique factors impacting this quarter's trends. Let's start by covering the monthly same-branch revenue growth -- April was 18%, May was 23%, and June was 12%. While our monthly same-branch revenue growth did trend down in June, there are two key factors impacting our business this quarter that altered the trajectory of the trends. Excluding these two factors, our monthly same-branch trends were fairly consistent at about 20% growth throughout the quarter.

The first factor is the impact of the year-over-year decline in our Boeing revenue. Excluding this revenue, our monthly same-branch trends would have been as follows -- April at 21%, May at 28%, and June at 21%. The spike in May of 28% was impacted by a large industrial project in our CLP brand. Excluding that revenue, same-branch revenue for the month of May would have been about 19%.

Now let's shift our focus to Q3 this year. For the third quarter of 2010 we expect revenue in the range of $295 million to $305 million, which is an increase over the same quarter a year ago of about 5%, which is less than the 15% growth we reported for Q2. The lower growth rate is mostly related to the year-over-year decline in Boeing revenue. In regard to Boeing, the impact to our Q3 growth rate is largely due to a prior year comparable as we hit our peak revenue of $45 million in Q3 last year and our estimate for Q3 this year is about $20 million.

Now let me provide some background on gross margin. Our gross margin for the quarter of 26.6% exceeded our expectation of 26.3%. The higher gross margin was largely the result of disciplined and successful price management efforts across the business.

Q2 gross margin compared to Q2 last year was down nearly 300 basis points due to two factors. First, nearly 100 basis points of this decline resulted from worker's compensation expense coming in at 3.7% of revenue this quarter versus our all-time low of 2.8% Q2 last year. Second, we experienced about 200 basis points of decline related to a combination of increased state unemployment taxes, an increase in the mix of light industrial and large customer work, and a price reduction offered to Boeing. We expect Q3 gross margin to be about 27.3% to 27.5%, which is a sequential increase of about 80 basis points from Q2 this year. About 30 basis points of the increase is related to fundamental gross margin improvement from disciplined price management, and 50 basis points is related to an increased mix in higher gross margin and markets. Our Q3 gross margin expectation includes an estimate of worker's compensation expense as a percentage of revenue comparable to Q2 this year.

On a year to date basis, we made great progress improving our gross margin. Our Q3 expected gross margin represents an improvement of about 200 basis points from Q1 this year. About 100 basis points of the improvement is from disciplined price management producing fundamental gross margin improvement. The other 100 basis points of increase is related to seasonality and other shifts in mix towards higher gross margin end markets.

Let me add some comments on sales, general, and administrative expense. SG&A as a percentage of revenue was 21.5%, which was 200 basis points better than our expectation of 23.5%. The lower than expected SG&A percentage was the result of our controlled process of managing expense and leveraging our cost structures across a larger revenue base. We expect SG&A as a percentage of revenue for Q3 to be about the same as Q2 this year, based on our Q3 revenue estimate provided today. We will continue our disciplined approach in managing SG&A, but we will make selective investments to support additional revenue. Generally we expect incremental SG&A of about 6% to 7% of incremental same-branch revenue.

I'll finish off by covering a few remaining estimates, income tax matters and cash flow items. For depreciation and amortization we expect about $4 million a quarter this year. For capex, we expect about $7 million to $8 million for the fiscal year. Our effective income tax rate was exceptionally low this quarter at 27%, due to an income tax benefit of $1.3 million this quarter, or $.03 per share, related to a prior period tax matter. We expect an income tax rate for the remainder of the year of about 40%.

Lastly let me address our fiscal year. This is a 53-week year for us, which results in a 14-week 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 the extra week to increase our profitability.

Now we can open the call for questions.

(Operator Instructions) Your first question comes from the line of TC Robillard with Signal Hill Capital. Please proceed, sir.

Thank you. Good afternoon, guys. I just wanted to -- first off, thank you for all the granularity in terms of breaking down your same-store or your same-branch metrics. I just wanted to get a sense from you how the first couple weeks, first three weeks of July have trended?Have they stayed roughly where June levels were in terms of on a core basis?

You know, that included the Fourth of July holiday. So it's hard to get a good read through those holidays. But we were pleased with where they performed and there was a little bit of a flip-flop there on those two weeks. But yeah, the summer's holding strong. I mean, the manufacturing business continues to look good.

I made earlier comments that construction isn't growing, but it's continuing to show signs of stabilization and looks fine. I mean, in our guidance here today you can see that our top line growth is down quite a ways due to the Boeing work falling off. But all in all, and the comps are getting a little tougher, so we're not looking for 20% same store sales in Q3, even excluding the Boeing work it's probably softening there a little bit there mostly due to the comps. So if you look at the our revenue dollar run rate it's holding pretty good to where we were in June. But that will produce a different percentage because of the period of time of the comps.

Okay. And can you remind me your seasonality in the third quarter? Is third quarter typically seasonally strongest in terms of your top line?

Yes. Third quarter is our strongest season. It used to be maybe 5% greater than Q-2. That's when we were 30% plus construction. With the construction mix being closer to 20% now there's not quite as much seasonality as it was back in '05. But there still is a few points of seasonality there.

Okay. And what I'm -- where I'm going, Steven, and what I'm just trying to get my arms around, is the sequential growth. I completely understand your Boeing revenues are less than half of where they were of the third quarter last year. So the deceleration of the top line makes sense to me. What I'm trying to get a sense for -- it would seem to me you should be seeing some better than mid-single-digit sequential improvement. And I know there's $8 million from Boeing probably explains half of that.

I'm just trying to get a sense, are you being a little conservative? Have things slowed a little bit? It doesn't seem so from the apples to apples same-branch stuff. Like I said, I'm just trying to get a little bit better comfort around where we are with the sequential move in revenues.

Yes. So keep in mind, Derrek pointed out that in May we had a large project also that was not Boeing. So there's two things that are impacting the Q2 same store sales number to make it more smooth. And that revenue won't be repeating at this point. We don't have it estimated in, either. So when you're trying to go sequential from Q2 to Q3, you would have to take the Boeing drop-off, the other account drop-off, you know, $5 million each or right in there, $5 million or $6 million, take those two and then apply your same-store sales factor from there.

Okay. That's a good point. I had overlooked the May customer.

And then, Derrek, just trying to extrapolate out on the SG&A side. On an absolute dollar basis is this a good level? I mean, this is two quarters in a row now you've been able to do that and you had really strong sequential revenue growth. I'm just trying to get a sense as to when we would expect to see some of that incremental pickup in terms of that 6%, 7% of incremental same store sales?I would have figured there would have been a little bit of an absolute dollar drift-up in SG&A and I'm just trying to get a sense as to how we should be thinking about this in absolute dollars as we go through the second half.

Well, I've said in my prepared comments I expect our percentage SG&A as a percentage of revenue to be about the same at Q2. We are guiding to a higher revenue base in Q3. So you are going to see some incremental pickup there. I think that's probably about as specific as we can give you.

Okay. I'll jump back in the queue and let someone else have a go. Thanks.

Your next question comes from the line of Paul Ginocchio of Deutsche Bank. Please proceed, sir.

Thanks for taking my question.

Back to SG&A, typically it is at least 100 basis points of falloff as a result of revenue in SG&A in the third quarter versus the second but you're not calling for that this quarter. Is that sort of just being conservative? Or do you think there's -- I'm just trying to understand why it wouldn't be down like it typically seasonally is?

Well, two reasons. One is that I mean this was an outstanding quarter for us. I mean, we didn't put on any extra incremental SG&A. So the team has done a outstanding job of managing expense..

Number two is we've talked about the impact of Boeing. So roughly speaking there's 25 revenue we would be forecasting revenue all things equal if we were staying with Boeing another $25 million higher. So it's the Boeing falloff that's impacting that percentage. If we were on an apples to apples bases with our Boeing run rate and revenue, this quarter versus same quarter a year ago, you'd see our SG&A percentage -- the percentage of revenue dropping.

That's helpful. Thank you. Just a couple -- in the Boeing or the large contract you talked about a $20 million base, that's sort of a number you think you're comfortable with going forward or is that just a number you're comfortable with in the third quarter?

Yes. It's a third quarter number. We don't have any guarantees beyond that. But we do -- we feel like it's settling around there, Paul. We don't know the exact base. But for a third quarter number it may come down because of seasonality or holidays, but right now we're feeling pretty good with that.

Thank you. Just a few housekeeping -- was there any worker's comp reversals and was there any impact on the gross margin from hire impact?

Yes. We had about 130 basis points of reversal in our work comp reserves. When I say 130 basis points, I'm saying the reversal as a percentage of revenue was about 130 basis points of revenue. There was a minor amount of higher acc credits this quarter but it did not even reach -- it wouldn't even be a full 10 basis points so it was very minor.

Thank you.

Your next question comes from the line of Clint Fendley with Davenport. Please proceed, sir.

Good afternoon, Steve and Derrek.

Steve first big picture question here. You mentioned that some believe that penetration rate for staffing will likely go higher than our previous peak on the last cycle. Do you believe that that will be true for TrueBlue? And if so why?

Well, it's certainly the trend that we're seeing right now. And the customers in businesses in manufacturing for sure are hiring back more temps than they were using. It feels like they're hiring back full shifts full of temps. There may become a point in time where they will start becoming more comfortable and they'll look to take some of these people from a temporary basis to a permanent basis, which we offer that service and opportunity for them to. But we don't see those conversions happening yet. So with our growth rates not only at TrueBlue but in the industry continuing to grow and the unemployment rates staying somewhat stable, it leads to the math that that penetration rate is going to go past 2% and somewhat higher.

Beyond that, there's talk out there in the industry what customers and such that it just feels more comfortable. It's a more agile way to run a business. And we find that as we go through these cycles and as companies find it harder to displace workers that they're more comfortable hanging onto flexible staffing even if it might cost them a little bit of markup during the peak of their cycle. They don't have to deal with the out-placement on the down side. And so as we've gone through a couple recessions in the 2000s and this one being a big one, lots of lessons learned.

So most of our information is coming from what we're currently seeing, but also what we believe on a long-term basis. It has happened in other countries and looks like it's happening here.

And obviously Steve, You've been in the industry for a long time. I mean, at what point do you think we will begin to see more of these conversions in the marketplace?

Well, this one looks so different. So it's hard to compare it back to the cycle of the early 2000s that this one is so construction-driven.

And it really depends. I think the longer that the uncertainty is out there and the media is talking about the uncertainty, I think that benefits the temporary business right now. Demand is definitely there, manufacturing facilities are continuing to have pretty strong output, but the media continues to talk up what the economy is going to do. I think that benefits all of us in the temporary staffing business. And it sure seems to be holding true, not only for us but others.

But businesses are a little bit uncertain. But it's a great time for us. We're bringing great quality to our customers. And as we've talked about here on this call, at the beginning of the year we were a little nervous about pricing and what that did to our margins that we were all jumping on this and we had the ability to produce the people. But that's tightening in itself. That's giving us a chance to get the margins back at a pretty rapid rate. And we're excited about that.

So maybe as margins tighten and maybe that will encourage businesses to do it themselves and start bringing some people back, but we're not seeing those signals yet, Clint. So we're feeling good about it.

Thanks, Steve. It's very helpful.

Derrek, a quick housekeeping question here. I think we saw about a $7 million sequential decline in the restricted cash balance -- I believe that may be collateral for your self-insured workman's comp. Anything to read into the decline here?

No. That's a good question, Clint. I wouldn't read anything into it.

Over the long run, the direction of the restricted cash and our worker's compensation reserves are going to be in pretty good step. But the restricted cash coming down, we would negotiate with our insurance carriers once a year. It tends to lag a little bit. So it's just playing a little bit of catch up. But I wouldn't read too much into it.

And obviously you communicated the 40% effective tax rate expectation for the year. Should we expect any volatility really between Q3 and Q4?

You know, I'm not expecting any. But it's an income tax rate. So there's a lot of complexities in an income tax rate, but I think we've got our handle on those issues. And it's somewhat dependent on what income is going to be at. But I think that 40% rate is a pretty good run rate, and one that I think will hold pretty well for the year.

Great. Thanks, guys. Nice quarter.

Thanks, Clint.

Your next question comes from the line of Paul Condra with BMO Capital Markets. Please proceed, sir.

Great, thank you. I just have a couple of quick ones. You mentioned in the gross margin expansion, I think you said you mentioned a higher mix toward a higher margin end markets? I wondered if you could just talk about that. Is that just the shift away from the Boeing contracts, or is there something elsewhere you're getting higher margin or higher billing contracts?

Paul, are you referring to our discussion around the third quarter estimate? Or the year?

The year.

Yes. So we talked about 50 basis points of pickup in gross margin related to higher gross margin end markets. It's a combination of two things. One is the combination of Boeing stepping down. Number two is Labor Ready performing very well and it being a season-only higher quarter for Labor Ready. Those two things combined are producing that extra 50 basis points step up.

Okay. Great. Thanks.

And I thought I'd just throw this out there. Are you seeing any pickup at all just in terms of the BP oil spill? Are you getting any of that business? Is there anything there for you guys?

There's some peripheral work around supplies and services, the workers that are in that area. But we're not on the beach front.

And then conversely like any slowdown just in terms of the work, the other industries that have been negatively impacted?

Not strongly, no.

Okay. And then just one last one. For the share count in Q-3, can you tell us what you're using for that? For the EPS estimate?

I think we've been in general you could see that this weighted average share balance at least on a quarterly basis, it is built around 100,000 shares a quarter or so, 150,000. That might change some if the stock price rachetted way up. But I think 100,000 to 150,000 share build throughout the year is going to get you pretty close.

Okay. Great. Thank you.

Your next question comes from the line of Mark Marcon with Robert W Baird. Please proceed, sir.

Good afternoon. I was wondering, on the Boeing, are we at the constant run rate? Or how do you envision that trending as we go through the third and fourth quarters?

Yes. We've mentioned that in our estimate is about $20 million for Boeing.

Right.

And then as we move towards the fourth quarter there maybe some seasonal adjustment to that. But that looks to be a pretty solid base.

As we talked about last quarter, the projects side of the business has stopped. We've talked about we took a pretty significant step-down in gross margin when this moved to more production-oriented work. And we would see the volume drop towards the end of the second quarter. So all of those things have happened. You saw the volume fall off in June and it's finding a pretty stable base of what production facility needs from temporary help.

They have goals set about how many people can be temporary in their plant versus full time as they move into full-term production for their own cost model. And so getting close to that, that model. And we believe we can outperform their expectations and keep us up as a significant vendor there. And that's why we think that $20 million number is pretty solid outside of any seasonal of holiday adjustment that may come as we learn about that further, Mark.

So basically aside from the holidays we're looking just short of $7 million a month roughly speaking for the balance of the year?

It definitely will hold strong through the third quarter. But it's not going to be materially different from that. But that's a good estimate.

Okay. And what about longer term? Do you think that's going to stay around those levels for as far as you can see or --

I mean, they haven't signed a contract with us to guarantee anything.

Sure.

But we know the percentage of temporary help they want in their facility. We're going to be pretty close to that as we got to the end of June. We we're going to hold strong. We believe we're a vendor of choice. There are other people that can bid on this work now that it's in full production. But we are the experts in this industry. We've been performing, we have the temps, the workers on-site and our margins match, the markup matches what's competitive to the others. So I believe that we can hold that.

The up side is there could be other projects that come along here and there so we could have spikes up from here. I mentioned also we have a pretty strong rsum now out there. And we're looking -- we're selling hard into the industry and into the military based on our experience of what we've had here the last couple of years.

Great. And then can you talk a little about what you're seeing with regards to just the core Labor Ready branches? You know, both in terms of just the total amount like what percentage of your business is now stemming from that as opposed to some of the newer offerings? And secondly, how are you thinking about those monthly trends, particularly with the construction typically being higher at this time of the year I was just wondering if that's still a year-over-year drag for you.

Yes. Well, it's exciting year for us with Labor Ready as we finished last year, we've been retooling our sales teams there and our service teams. And we've had some good growth last year from Boeing and the manufacturing business of Spartan taking off. But all in all, Labor Ready really followed that trend.

And they follow pretty close to what Spartan and if you follow some other publicly-traded companies that serve light industrial but Labor Ready is following that trend pretty good. And it's about 60% of our overall revenue. It's holding good to that. So as you've seen our growth rate's up at 15%, our business mix hasn't changed that much.

Derrek has spoken here about gross margin trends changing. As Boeing comes off, Labor Ready is probably going to be picking up a point or two of our mix. And that's going to drive gross margins higher. But we really feel that Labor Ready will continue to grow throughout the third quarter to get us to these numbers we've projected here today.

So yes, a solid branch, solid service offering, and the margins are holding strong and the demand is there so we're excited about that. It's definitely one of the wins of 2010 is to see the strength of the Labor Ready brand.

That's great. And it sounds like the monthly trends have been fairly consistent and probably fairly consistent going into July.

Yes. So there's some talk about seasonality just within the Labor Ready brand. And one of the things that helped drive the second quarter was Labor Ready stepped up early in the season.

They beat our expectations coming out of our revenue guidance. Part of the reason that we were a little shy is that abnormal growth -- the seasonality felt to pick up late April, early May faster than we had anticipated.

Now, did we get the seasonality already and so will it pick up sequentially from Q2 to Q3? That's yet to be seen. There might still be some step up. But we're really proud of the early step up in the year that we got that drove a great Q2, and we are expecting a solid Q3 out of them. But sequentially, it may not be as big as it was between Q1 and Q2. But they're performing very well, Mark.

All right. One technical question for Derrek. On the workers' comp accrual reversals -- do you anticipate that you could continue to see those for the next year and a half or so, or two years? Or how shall we think about the gross margins inclusive of the adjustments for workers' comp?

Well, when we talk about work comp and we give some -- well, two things, Mark. While we give directional guidance around Q3 that we expect the expense to be the same as Q2, that's really all the further out we can go and give anything specific.

When we look at work comp we look at it as run rate. This question has come up a lot. It came up a lot in last year. And directionally, what we have said is last year we got down to a low of about 2%. Or excuse me, 3% of work comp as a percentage of revenue. That was inclusive of credit. Excluding the credits, our run rate is about 5%. So really directionally we think that work comp rate will settle out somewhere in between the low we were at 3% and what our current run rate is. There is more work to be done in worker's comp, both from a safety perspective, a claims perspective, and an overall risk management perspective. So there's more work that we think we can do.

It just gets too complicated trying to break this down into the different components. I think we need to look at it as one bucket. And what I'm telling you is somewhere between 3% and 5% is a pretty good estimate.

I appreciate that. It's just we obviously get the question about the sustainability in terms of the worker's comp accrual reversals and whether or not at some point gross margins are going to fall off by the amount of the accrual reversals that we've experienced in the past. And it sounds like what you're saying is not anytime soon.

Yes. I'm giving you my estimate for Q3. And we're looking at it as one big buckets. There's two parts of the work comp rate, there's the run rate that we're at and there's the credits. So at some point in time the credits will go away. That is a fact. What is yet to happen is our run rate to settle in. And I'm telling you I think we've got more work to be done and some more benefit that can be done to bring that down in the future.

Great. Appreciate the color.

(Operator Instructions). You have a follow-up question from the line of TC Robillard with Signal Hill Capital. Please proceed, sir.

Great. Thank you. I just wanted to follow up on one of Mark's questions around Boeing. Has Boeing put out their temp work to bid or are you still the only provider right now?

Yes. What's happened here, TC, is we were a project provider that was kind of outside of the contracts group. And so when they had some special needs that developed over the last couple of years our team was able to service those in a project basis. As things stabilize and it becomes more normalized production, then it goes through their contract group. And once we go through their contract group they have several approved suppliers and we become one of those approved suppliers. Now, we happen to have the assigned employees down in this plant. So we have a foot in.

But every new order that comes in for that plant beyond who we have placed, so when there's turnover or new needs there is somewhat of a jump ball. So it is in a competitive situation. And that's why our margins move down to match where the competitive bid is going forward.

We believe we have the best rsum and the best reason to win those and we have a foot in the door, but there will be a competitive bid situation on new work. But we have a stronghold on those that we have currently assigned and in place.

Has Boeing given you a sense, are they looking to diversify suppliers? Or is their sole focus price?

Yes. It's not so large they're worrying about diversifying suppliers in this situation. That's not their point.

And it's not -- and price is a component but service and quality also comes into play. So to be an approved vendor, to be able to play at this rate, we can't let our prices get out of market. They have a really good system to control market. They know what market is. And this is a -- it's very transparent. So as long as we're playing at market, we believe that we can win from there.

Got you. And then just lastly, you guys continue to generate consistent solid cash from ops, even with accelerating your new growth. So you've got a good cash balance here. Any thoughts on what you're going to do with the cash balance? Or at least from the end there's obviously some you've got to keep for working cap needs. But just thoughts on the excess cash.

Well, it's nice as we're showing growth and that we've been able to fund our receivables from that cash balance that we had conserved during the downturn. And that's an exciting period of time. But the growth rates continue. And we're probably closer to peak of our cycle so the cash balances look pretty secure. And it grows from here.

So giving us a chance to sit back and take a breather and say, well, what do we do from here? We're not in a huge hurry to make a decision, but our two methods of uses of capital most likely will be that we've used in the past will be what we do in the future, and that is a mix of acquisitions and share repurchase. And both need to be priced properly and provide a good return on investment to our shareholders. So we'll exercise some patience of using that cash, but that's the two methods. I can't give you any signals as far as speed. But I don't think that one, two, three, four, five quarters makes that big a difference to return on investment right now. So somewhat of a cautious approach there, but we are looking at it, analyzing it and talking about it next steps there. It's a part of the cycle, and some conversation.

Sure. Absolutely. Has that made it to the consistent agenda from a board level?

Yes. Our management team has included the board in these conversations. And they're well aware of where we stand and what a good cash balance might be and what good uses of cash might look like and what types of analysis need to be brought forward. Our acquisition team is continually on the hunt looking for good ROI and operations that we can run and not change up our mix or our culture to damage the organization, but those things take patience. That's one thing we do know.

Understood. I appreciate the insight, Steve, thanks.

Your next question comes from the line David Ridley-Lane with Bank of America. Please proceed, sir.

Sure. On the last conference call you mentioned construction revenue overall declined in excess of 30% in the first quarter. Could you give a comparable year-over-year figure for the second quarter?

Yes. Residential was pretty much flat and commercial was down 10%. So on an overall basis, construction was --

I would say we did have one large industrial project. So I'm going to exclude that from the trends. That brought us actually into overall positive growth for construction. But if we backed that project out we would be relatively flat on a year-over-year growth rate perspective.

And Steve has indicated here, from a run rate perspective we think we're seeing some signs of stability here in the revenue category for construction. But nothing taken off like the rest of our end markets.

Okay. And congratulations on the good work on the gross margins. How are the pricing conversations with your clients going at this part of the year?

Well, I think proven out in our comments that we're actually seeing traction, it's good. It's not a market where you can -- where you can go charge anything in any industry right now. The competitive front is still strong. Customers are still sharp with their own cost control needs and being agile in how they're running their businesses. But it's negotiable. So finding if we're bringing the right people to the table we're getting the rates that we can get by on. So we're actually, you know, we're really pleased at this early point of the cycle that we're seeing momentum. Obviously at the beginning of the year I think most staffing companies you would have heard some nervousness about how long will these lower rates last. And we're excited that we've seen some momentum.

Okay. And just one last sort of housekeeping. Were there any office closures in the quarter?

Yes, there were. There were four -- or excuse me, actually there was more than that.

There were 12. We had 12 closures. I wouldn't read too much into that. They were sporadic geographically, mostly in the Labor Ready brand, some consolidations going on there. Keep in mind, too, that we even back in 2006 we were averaging about eight locations a quarter. So some of these closures that you see as well as the actually had four openings. Some of these are built around customer expectations. A need here, a need there, transfer of a need, so we had four openings, 12 closures, but I wouldn't read too much into either one of those.

Okay. Thank you very much.

(Operator Instructions). You have a follow-up question from the line of Paul Condra with BMO Capital Markets. Please proceed, sir.

Hey, guys. Thanks for taking another question from me.

I wonder just on the Boeing contract, you know, they have this bid out for this supertanker project. And not to speculate too much, but is that the kind of thing if they were to win that project that you could possibly provide similar services like you do for the 787?

It depends. Most likely something like that is not going to drive us. That plane is being built on a model they've been producing for quite some time and there's standard production and there's union contracts around. One of the things we're not doing is getting aggressive around where the union does the work and the union does the contracts. But that doesn't mean that a spike in demand in that area won't cause an opportunity. But we don't see that as of yet. Since it's being built off of an existing line that's there in the union stage.

Okay. Great. That's all I had. Thanks a lot.

With no further questions in the queue I would now like to turn the call back over to Mr. Steve Cooper for closing remarks. You may proceed, sir.

Thank you. And we're pleased with your interest in our company and being here and asking questions today. And we look forward to updating you as we proceed throughout the year.

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