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TrueBlue, Inc. (NYSE:TBI)

Q1 2008 Earnings Call

April 16, 2008 5:00 pm ET

Executives

Stacey Burke – Vice President of Corporate Communications

Steven C. Cooper – President and Chief Executive Officer

Derrek Gafford – Executive Vice President, Chief Financial Officer

Analysts

TC Robillard – Bank of America Securities

Christine Woo – Morgan Stanley

Michael Carney – Coker & Palmer Inc.

Clinton Fendley – Davenport & Co.

Mark Marcon – Robert W. Baird & Co., Inc.

Jeffrey Silber – BMO Capital Markets

Michel Morin – Merrill Lynch

Operator

Welcome to the Q1 2008 TrueBlue earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Stacey Burke.

Stacey Burke

Here with me today is TrueBlue’s CEO and President, Steve Cooper; and CFO, Derrek Gafford. They will be discussing TrueBlue’s 2008 first quarter earnings results which were announced after market close today. Please note that our press release, and the accompanying income statements, balance sheet, cash flow statement, and financial assumptions, are now available on our 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.

Though 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 materially differ 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.

Steven C. Cooper

Thank you for joining us this afternoon to discuss our first quarter operating results for 2008 and give you a recap of our strategic progress. Earlier today we reported revenue increased 12% this quarter over the same quarter last year to $324 million. Earnings per share came in at $0.20 for Q1, and that is at the high end of our guidance of $0.18 to $0.20, compared the $0.21 we had a year ago.

Acquisitions fueled by revenue growth during the quarter contributed a 15% increase in revenue, while revenue in our [inaudible] operations was down about 3%. We lost about 3% of our revenue from the 58 branches we closed over the past four quarters. Excluding the impact of closed branches we came in about even with last year, which is an accomplishment in this tough operating environment.

Net income for the quarter of $8.8 million declined 15% as compared to a year ago. This decline was primarily allotted to three things. First, the unit net increase in the wages we pay to our workers continues to outpace the growth in the rates we charge our customers. This gap is primarily driven by the size and volume of minimum wage increases at both the federal and state levels over the past year. In addition we have seen an increase in the intensity of the pricing pressure applied by our customers and competitors.

We have closed this gap slightly over the past quarter and I’m pleased with the progress we’ve made and I’m hopeful that we’re going to continue to narrow this gap as we are focused on doing so. Despite the [inaudible] contributing to our decline in net income are the increased operating expenses we’re incurring to support the new platforms we have acquired recently. We have completed four significant acquisitions over the past year. We believe these current adjustments will raise significant cost leverage in the future as we build out these important platforms and complete our back office integration plans.

And the third item contributing toward our decline in net income is the higher amortization costs and lower interest income than a year ago after investing cash of more than $80 million in acquisitions and $150 million in share repurchases this past year.

The fundamentals and financial stability of our company remains sound. Earnings before interest, taxes, depreciation, and amortization improved compared to a year ago despite our decline in net income for the quarter and we continue to produce strong cash flows from our operating activities. We are not debt-prone and had $75 million in cash at the end of the quarter.

Derrek will discuss these items in more depth during his comments today. The operating environment continues to be challenging and economic conditions have surely had an impact on us this quarter. In ten and a half weeks we have maintained essentially flat same branch revenue growth for the past year.

Our trends were stronger during the first quarter, up until the middle of March. During the last two weeks of March and the first two weeks of April we have seen our same branch revenue decline about 8% to 10%, significantly off the trends we had experienced during the first ten weeks of the quarter and over the past year.

This step down in revenue has been broad-based across new geographies and does not correspond to one customer industry. We have provided guidance today that revenue for the second quarter will be in the range of $350 million to $355 million, basically flat with last year. We are projecting revenue growth from acquisitions during the second quarter of approximately 12%, offset by core operations experiencing revenue declines of about 12%.

Understanding that our customers have costs to control as their own demand and needs fluctuate is the primary driver of our business model. We are continuing to make investments in our people through more focused sales and customer service training.

This training is focused on developing stronger customer relationships and putting ourselves in our customers’ shoes to better serve their fluctuating needs. The scalability of our services is vital for our customers in volatile periods so they can control their labor costs efficiently as their business slows. That’s a big part of the value that we provide.

We have taken the challenge of slow demand and found ways to place workers in many different types of jobs. As demand picks up for our customers we will continue to do that for them, to help grow their businesses, help them succeed, and of course, continue to drive the operating leverage in our own business model.

We are projecting lower earnings for our second quarter of 30%, which is likely to result from the same three things I mentioned that impacted the first quarter’s 15% decline, with the additional impact relating to the declines in same branch revenue we have most recently experienced. Our strategy to grow revenue and income includes broadening our enriched approach to serving the blue-collar market through three separate lines of business.

First, serving the general labor needs with our 772 Labor Ready branches. Second, serving the longer-term needs in the light industrial markets with our 31 Spartan Staffing branches and the 43 PMI branches we intend to own by the end of April, as announced today. And third serving the higher blue collar skilled needs in our skilled trades group with our 87 CLP Resources branches which serves the skilled construction trades, our 10 TLC Drivers offices which serve the transportation markets with experienced truck drivers, and our Plane Techs operations which provide experienced aviation mechanics.

Some strategic actions taken most recently include in December 2007 we renamed our company to TrueBlue, to clarify our enriched approach to serving the needs of the labor markets and our growing company.

Also in December 2007 we acquired Plane Techs, a provider of aircraft maintenance staffing. We also include Plane Techs as part of our skilled trades group and are very pleased with their performance last quarter as they are stepping up the high demand for aviation mechanics in the marketplace.

In the first quarter of 2008 we acquired TLC, a recruiter and provider of truck drivers. TLC will join our growing skilled trades group as we further penetrate the transportation market with experienced truck drivers for both [inaudible] positions and short-term, temp rate positions. TLC operates out of 10 offices, mainly in West Coast locations.

Our strategy is to take this business nationwide through a combination of acquisitions and organic openings. The opportunity to grow that service is great as the talent shortage for drivers has been identified by both the 2007 Manpower Survey and the U.S. Department of Labor 2007 study as one of the highest areas of talent shortages today, and most importantly, in the future.

As you can see, the skilled trades group of TrueBlue is coming together to serve the highest skill sets within the blue collar labor markets where we continue to see high demand for these type of workers.

Earlier on today we announced our signed agreement to acquire Personnel Management, a light industrial staffing company with 43 branches, mainly in the Midwest. We are excited to add PMI to our TrueBlue family. PMI will join forces with our Spartan Staffing brand to continue the growth of our light industrial platform, which will represent a combined force of 74 branches operating in the Southeast and Midwest regions.

The light industrial staffing segment in the U.S. is a $90 billion market and is projected to continue to grow at over 6% throughout the next decade. We are excited about our expanding footprint and leadership in the light industrial marketplace.

We welcome employees of all these strategic investments into the TrueBlue family and we look forward to growth opportunities in these exciting markets. We have proved our mixed approach to branding and going to market will set us aside as the leading provider of blue collar staffing.

The acquisitions over the past four years, starting with Spartan Staffing in 2004 and CLP in 2005, up to these most recent acquisitions have made a positive contribution to our revenue, EDITDA, and cash flows and they have produced equitable returns on invested capital, all the while providing the clarity we want in the marketplace, which will provide great long-term growth opportunities in the years ahead.

Through the execution of our strategy to grow through acquisitions, we have not only provided above average returns on invested capital, we have added depth to our management team. Improving our own operating performance by sharing best practices across brands and perhaps most importantly, we’ve established new regional platforms that we can expand and grow into a national presence.

Our main focus over the next year will center on integration and optimization of our current structure in each one of our current brands. Although there is short-term uncertainty in the economy and labor markets, we are optimistic about the long-term demand for both skilled and unskilled blue collar labor, especially in the small-to-medium-sized business markets, which is where our services are most widely used.

At this time I’m going to turn the call over to CFO Derrek Gafford for further details on our operating and financial trends and then we’ll open up the call for questions.

Derrek Gafford

I’ll spend a few minutes following up on Steve’s business discussion by pointing out the key operating and financial trends, starting off with revenue.

Revenue for the quarter was $324 million, which represented growth over the same quarter a year ago of 11.6%. Revenue was above our initial estimate of $312 to $317 million due to stronger than expected performance from Plane Techs, which was acquired in December 2007 and the acquisition of TLC Services during February 2008.

Of the 11.6 percentage points of revenue growth this quarter, 15 percentage points was from acquisitions completed in the last 12 months offset by a decline in organic revenue of 3.4 percentage points.

I would like to summarize the components of this quarter’s organic revenue decline. Branches closed within the last 12 months decreased revenue by 3.2%. Same branch revenue decreased by 1.6%. Revenue from new branches opened in the last twelve months provided 1.3% of growth.

The Easter holiday occurring in the first quarter of this year versus its occurrence in the second quarter of last year decreased revenue by 0.5 %. And last, currency fluctuations provided 0.6% of growth.

I also want to highlight our monthly same branch revenue trends this quarter in comparison with the same period last year. January decreased by 0.2%, February decreased by 0.1%, and March decreased by 3.8%. The rate of decline in our same branch revenue, despite the [fervor] during the last two weeks of March and into the first two weeks of April. During this four-week period same branch revenue declined at 8%-10%.

For the second quarter of 2008 we expect revenue in the range of $350 to $355 million. This represents growth from acquisitions of 12% and a decline in organic revenue of 12% resulting in total sales for Q2 of this year being about the same as Q2 last year. It does not include revenue from the acquisition of PMI.

If the PMI transaction closes at the end of April as anticipated it will add approximately $20 million of revenue to the second quarter. We do not expect the acquisition to impact our diluted earnings per share estimate due to integration costs and the amortization of intangible assets.

Now let’s discuss the trends in gross margin this quarter. Gross margin was 30.4% this quarter, which was close to our estimate of 30.5%. Please keep in mind when comparing our quarterly gross margin this year to the same period last year that the acquisition of Plane Techs lowers our blended gross margin by about 1 percentage point.

Pay rates have been growing faster than bill rates for several quarters as a result of minimum wage increases, a lower mix of construction business, and a competitive pricing environment associated with a slowing economy. However, we have made some progress in this area.

During Q4 2007 pay rates were in excess of bill rates by 1.7 percentage points. During Q1 this year the gap between pay and bill rates dropped to 1.4 percentage points which continues to be a key focus for us as we move through the rest of 2008. Our estimate for gross margin for Q2 2008 is 30.5%.

Sales, general, and administrative expense as a percentage of revenue was 25.5% this quarter, in line with our expectation for the quarter of 25.3% to 25.7%. In dollars SG&A increased by $5 million this quarter compared to Q1 last year.

The primary business events driving the increase are the SG&A expenses from companies acquired in the last 12 months, new branches opened within the last 12 months, less the SG&A from branches closed within the last 12 months. These items will continue to be components impacting our SG&A next quarter. Based on our revenue estimate we expect SG&A for the second quarter of 2008 to be about 24% of revenue.

During 2007 we did a thorough review of our branch network resulting in the closing of 58 branch locations. As our customers adjust their needs for our services we, too, must make adjustments. Based on revenue trends we have discussed with you today we are re-addressing our branch, field, and corporate expenses to scale our cost structure to meet current demand levels. We don’t have any details to share with you today but we will share them with you as we take further action to control our operating expenses.

Interest income was $1.4 million less than the same quarter a year ago due to a lower investment yield and a lower cash balance related to acquisitions and stock repurchases over the last year.

Our income tax rate for the quarter was 36.5% and at the high end of our expectation of 36% to 36.5%. We also expect our income tax rate for Q2 of 2008 to be 36% to 36.5%.

Diluted net income per share for the second quarter of 2008 is estimated to be between $0.28 to $0.30 and is based on an estimated weighted average share account for the second quarter of $43.7 million.

I’ll finish up here with some highlights on the cash flows and balance sheets. We finished the quarter with $75 million of cash. Cash flow from operations declined by $14 million this quarter in comparison with the same quarter last year, primarily due to timing differences associated with income tax payments.

Our allocation of capital between strategic acquisitions and stock buy-back will continue to follow the same disciplined ROI approach we have used in the past. The ROI on potential acquisitions must exceed our internal equity goal of 20%, otherwise excess capital will be invested in share buy-back.

Since the beginning of 2007 we have repurchased $150 million of our common stock and with the acquisition of PMI our investment and acquisitions will reach a total of about $100 million.

Depreciation and amortization increased $1.5 million this quarter in comparison with the same quarter last year. $1.1 million of the increase is due to the amortization of intangible assets associated with our recent acquisition. Our total acquisition expense for intangible assets was $1.5 million in this quarter.

Day sales outstanding increased to 38 days this quarter compared to 36 days in the same quarter a year ago. The increase is related to a longer cash receipt cycle for the Plane Techs’ business. Plane Techs’ customers are comprised of large, well-capitalized companies that have a history of maximizing their accounts payable leverage. Excluding Plane Techs from the quarter DSL would have been about 35 days.

In regard to capital expenditures we expect CapEx of about $7 million for Q2 this year.

We also announced earlier this week that we renewed our existing $80 million credit facility for a 3-year term with one important addition. With the bank’s approval, our new facility allows us to expand our credit line up to the lesser of $160 million or 2.5x our trailing stock. While we have no immediate plans to use this extra liquidity, it does position our already strong balance sheet with additional capital if needed.

While the current economy is presenting us with some challenges, our top priorities haven’t changed. Driving profits in our core operations and scaling our business to meet current demand remain at the top of our list.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from TC Robillard of Bank of America Securities.

TC Robillard - Bank of America Securities

I just wanted to draw down a little bit on the operating margin structure as we look at skilled trade. Clearly it seems like there’s a lot to be gained. You are doing a good job on the acquisition side diversifying the business. Could you just give us a sense of how that compares, I know construction has always been your kind of high margin business. How does Plane Techs, how does TLC, compare to your other services.

Derrek Gafford

It probably best to just focus on Plane Techs for now. TLC, because if we’re looking at in on a year-over-year basis, that’s where the majority of the impact is. Roughly speaking Plane Techs’ decreases are gross margin by about 20 basis points, or about 100 basis points. But net-net it increases operating margin by about 20 basis points, so it’s actually additive to the margin.

TC Robillard - Bank of America Securities

And do you expect TLC to have a similar type of profile once that gets normalized into your business, or is that a situation where you need greater scale because of the small amount of geographic focus.

Derrek Gafford

Yes, right now it’s not really much of an impact but we would expect to approximate our current operating margin. And we’re going to need some more scale there. Right now we’ve only got 10 branches, so it’s a good start for us, but it’s just a start.

TC Robillard - Bank of America Securities

Now, is that in the area where there are other decent size acquisition candidates that can give you a geographic footprint quicker, or do you get the sense that this is much more of a multi-year organic story, the TLC, specifically.

Steven C. Cooper

Yes, it’s a combination on this, Bill. There are some other like-sized companies out there, but our first approach is going to see if we can work some order where we have a place that leads to some other brands and do some office sharing and really leverage this cost up a lot.

So that’s our first approach this year, but if we can look at these other regional companies along the way, we will. We’re quite excited that the way we do dispatch in this business, and on a centralized basis, to control the compliance out of one centralized location so we can expand the sales and the recruiting pieces quite quickly where we see the demand, by throwing these folks in one of our existing brands. That’s what where we’re most excited about this business.

TC Robillard - Bank of America Securities

And can you give us, Derrek, a sense as to what TLC’s revenue base was for 2007?

Derrek Gafford

It was about $25 million.

TC Robillard - Bank of America Securities

For the full year? That was for all of 2007?

Derrek Gafford

Yes.

TC Robillard - Bank of America Securities

And is there any major seasonality in that business?

Derrek Gafford

Not like you see in our current business. It’s pretty steady state.

TC Robillard - Bank of America Securities

What gives you the comfort, in terms of continuing to narrow down that bill rate/pay rate gap? Is it just coming down to a sense of anniversarying that issue or are you starting to get some traction with your customer base in terms of accepting the fact that it’s minimum wage. It’s not as if you are trying to jack up your profit margin. Can you just give us a little more color around your comfort there? And when you would expect to see that gap at zero?

Steven C. Cooper

Well, there are some opportunities here there are some challenges. On the opportunity side our team has been focusing on it, we’ve made good progress on it over the last quarter and it’s something we’ve been making some progress on actually each month, really, since we closed down 2007.

So it’s definitely a key area of focus between with all of our operators and we’re making some good progress on it. But we’re not done with minimum wage increases yet this year. We’re probably about a third of the way through minimum wage increases and there are some more coming during the back half of the year. So there are still some challenges there.

I can’t give you a date on when we’ll have that thing to zero. I don’t have perfect clarity in what the rest of this year will look like and what this economy is going to present in terms of challenges. And that would certainly have a bearing on it, TC.

TC Robillard - Bank of America Securities

Can you share anything as to what’s been the success so far that your team has to meet? Is it they just give a much harder kind of pitch to your customers? Is it just a situation where you’re getting some market benefit to where some of the competition is seeing the same issues? I’m just trying to get some examples.

Derrek Gafford

I think it’s a couple of things. One, is we’re certainly coming around on some anniversarying going on here and that’s helping us in sales. But it’s been tough all the way around for the industry and I think it’s starting to set in with some of the competitors that there’s only so far this can go. And thirdly, I would say our own operating team is just making it a bigger part of their discussions and their action plans for each month, as far as operating activity.

Operator

And from Morgan Stanley you have a question from Christine Woo.

Christine Woo - Morgan Stanley

I will continue along the line of questions regarding some of your acquisitions. With the Plane Techs business, I’m curious to see what impact we’ll see, if any, from the recent disclosures of some of the smaller airlines.

Steven C. Cooper

I don’t believe that’s going to have a fast impact on us. It may make some mechanics more available, which would be a net win for us. Even all this noise that American Airlines has created isn’t providing a big win for us there because they don’t outsource their maintenance, American Airlines.

But in general, there’s just a growing need because the aircrafts are aging out there and they strip these things down every 30,000 take-offs and landings and there’s a huge need for the maintenance and repair of these aircraft.

The little battle that we’re fighting here, to gain more revenue and we’ve really grown our revenue nicely in this industry, is finding more mechanics. The amount of open orders that exist out there are fantastic and we wish we could fill them all today.

But our teams are gradually filling the orders as the airlines, especially the in-between providers, these maintenance repair organizations, are coming to grips with the fact that they’re going to have to pay these mechanics more in this tough environment that’s out there and they’re actually giving in to that. So, we’re seeing nice bill rate increases in that business, which is also making it easier to recruit, which is the hardest part of the growth game for Plane Techs.

Christine Woo - Morgan Stanley

If I were a mechanic, is the compensation relatively equal to go to work for a Plane Techs type of business versus going and working directly for an airline?

Steven C. Cooper

It’s pretty close because most of these mechanics have the floor usually in one of these maintenance repair organizations. We will have about 1/3 of the employees on the floor. And they’ll take 2/3. And that way they can match their peaks and valleys using our staff. So the pay rates have to be fairly close, especially including the travel per diem that they get to go out there. It’s actually been better for the temporary workers, with the travel per diem. We’ve just got to pay them.

Christine Woo - Morgan Stanley

The PMI acquisition, I was wondering if you could share what the revenue run rate has been, maybe in the last 12 months.

Steven C. Cooper

It’s been around $10 million a month.

Christine Woo - Morgan Stanley

So it sounds like there could be some revenue upside given the $20 million you talked about or did your $20 million assume about a $10 million run rate with the acquisition closing at the end of April?

Derrek Gafford

Right, because that would give us May and June.

Christine Woo - Morgan Stanley

When would you expect the company to contribute to earnings? You said we shouldn’t expect any EPS impact in the second quarter.

Steven C. Cooper

We need to get some growth from here. But we bought this at a good enough price that we can really withstand the current economic pressures that we’re seeing out there, so we feel very good about 2008. But a lot of it ends with the amortization and that takes a few years to run off.

But what we like is the upside to the EBIDA and cash flows that it creates. So, we’re measuring [inaudible] on a cash on cash return basis and trying to keep that return on equity high, especially on a cash on cash basis. But it will take four to seven years to run off most of the increase in amortization that we’re picking up because of these acquisitions.

So the real edge to there is it’s going to take some growth from this $10 million but what we’re most excited about this is the scale that it’s given us, to have 74 offices now doing this, in a very tight region and in the increase in the leadership. So, in my prepared remarks I made the comment about it’s now time to integrate, optimize, and make sure that we’re really ready going forward.

From here, we don’t need to maybe do more of a tuck-in type acquisition because we now have the right size of team and support structure that we believe that we can expand and really leverage the cost structure that we just put in place now. I don’t believe that we’re going to go hard at that during 2008.

Again, we like the economics of this deal we’ve put together. But we have some inner bricks work to do before we’re ready to start expanding. That’s where most of that questions gets answered, though, is when we start growing the same branch revenue and expanding the operation in the upturning economy.

Christine Woo - Morgan Stanley

You’ve talked about the amortization, what sort of amortization impact can we expect on a quarterly basis once you do complete the transaction?

Derrek Gafford

We’ll come back and answer that one before we get off the phone.

Operator

Your next question comes from the line of Mike Carney - Coker & Palmer.

Michael Carney - Coker & Palmer Inc.

California is obviously pretty ugly, so is it reasonable to assume that the 10% change in comps really fast, a lot of that was coming from California or as you just described if there’s any difference in the regions.

Steven C. Cooper

Actually California’s not the cause of this change over the last four weeks. California was already giving some headaches, but the trend change was not driven by California. It’s still under pressure, but that wasn’t it. It was really broad-based. We’ve noticed, in particular I would say the Northwest is a little more challenging than it was during 2007, Oregon, Washington, and even in some of the Rocky Mountain states of Colorado down into Arizona. Those were a little more challenging.

We’ve seen in the Northeast a little more challenge, also. Although Ohio and Michigan were already hard hit, we’ve felt increasing pressure there over the last four weeks. And then, we have already talked a little bit about the pressure we’ve seen in Florida over the last year.

We’ve moved up the coast a little bit into the bordering Southeast, along the coast and some of those states. So, this has really spread into these states that we haven’t talked about. Florida and California continue the pace that they were already on and really not the cause of this last four weeks.

Michael Carney - Coker & Palmer Inc.

So, Steve, is the four weeks of the period, were they all in the range of 8% to 10% or was there some big variation there?

Steven C. Cooper

There was a lot of variation. Those four weeks, we had to neutralize them because in our business the week of Good Friday and Easter even though it’s not a day off, they do hurt our business. This year they were the last two weeks of March; last year they were the first weeks of April.

So when the last weeks of March showed some struggle we said, “Well, it’s just the holiday weeks. We’ll come out of it.” And on a year-over-year basis we should have been knocking the ball out of the park the first week of April, especially since we’re comping against two holiday weeks last year and it didn’t happen.

I know that this is just four weeks and it’s quite a downturn in our projections but we really needed to do that to put you on notice that we had seen a four-week trend change. During the last recession I remember that the holiday weeks and coming out of holiday weeks were always our toughest weeks.

People react differently and when orders are a little bit shallow people take extra time off around the holiday weeks since there’s not a lot of back order, back log. And we experienced that the last downturn and it appears that 2008 might respond a lot like 2001 did, in regard to the holiday weeks.

Michael Carney - Coker & Palmer Inc.

So the skilled trade segment at Spartan, were they down just like Labor Ready? Was there any difference there?

Steven C. Cooper

Not quite as much but the CLP branches were because those are more construction focused, serving small contractors and things like that. That’s really where you see a lot of it. Spartan just kind of ran two normal work weeks.

Michael Carney - Coker & Palmer Inc.

So you could definitely tell commercial construction kind of was impacted?

Steven C. Cooper

Well, I don’t know about that. Who was impacted were smaller employers and those people that we refer to more as retail, where they’re taking two workers for a shorter period of time. And usually that’s where we see our first downturn in this business, is on that type of work, where smaller contractors that don’t have long-term contracts or a lot of employees out, we fill it for them. So we’re reading past experience into this last four weeks and saying we might have some struggles ahead.

Michael Carney - Coker & Palmer Inc.

If you see this, what you’re talking about, why would you make another light industrial acquisition even though it maybe helps you geographically? You could experience some troubles in the next 12 months. Was it just you thought the price was so right that you would go ahead and do it now?

Steven C. Cooper

Well, there’s a couple of things there. Number one, we believe in the strategy of putting together this light industrial leg of our business and we needed one more step here to get some economies of size going and the back office support structure that this PMI deal brings to us we are quite excited about. So that was the starter of the great strategy and we had done the work over the last three months, we were ready to go.

Yes, we could have pulled the plug but we worked with the seller of that business and we were able to work in a quite large downturn for 2008 that hasn’t occurred in that business, yet we priced it in as if. And we are quite fortunate that we were still able to put the deal together.

It was strategically the right time for them to sell, and maybe not the exact right time for us to buy because of the uncertainty, but it was still enough to price that we’re okay here.

Michael Carney - Coker & Palmer Inc.

So was the valuation similar to what you always make or was it lower than?

Steven C. Cooper

It was much lower on a trailing 12-month EBITA basis. Go ahead and say, “What if the business declines 20%?”And then you model that in and then it’s going to be closer to our standard purchase price.

Michael Carney - Coker & Palmer Inc.

I’m assuming that the light industrial, you’re still pretty comfortable that you’re probably never going to see the same type of operating margins, or whatever, that you see in the high Labor Ready business, right? Do you expect to have 10% someday in light industrial margin?

Steven C. Cooper

Yes, you’re right. A lot of this has to do with getting the volumes up and 2008 is not the year to be talking about larger volumes in these branches. I understand that. This is a longer-term strategic play for us, where we didn’t have to invest a lot of capital to make a pretty sizeable footprint impact to our business.

Operator

Your next question comes from the line of Clinton Fendley – Davenport & Co.

Clinton Fendley - Davenport & Co.

Derrek, I wondered if you could remind us, what the workman’s comp as a percentage of revenue was for the quarter?

Derrek Gafford

Before I do that I’m going to answer Christine’s question, Clint, because she had asked a question about the quarterly amortization for PMI and that will be approximately $300,000 a quarter.

Work comp this quarter was 4.2% of revenue.

Clinton Fendley - Davenport & Co.

And how have the accident rates trended here in the last quarter or so?

Derrek Gafford

We’ve still been making some progress on our safety, so we’ve had a great track record going for five years now. The team is still working really hard on safety. With the safety thing, there are a couple of new things that we are looking at right now.

We haven’t rolled out anything new over the last year, but we’ve still been seeing trends come down. The more time we spend on safety, the more we raise the education level with the operating team and just the more competency is built in to our craft, so we’re still seeing some positive traction there.

Clinton Fendley - Davenport & Co.

And could you talk a bit about between each of these three recent acquisitions about the culture that they have around safety and the opportunity that you might have to decrease some of the accident trends within these businesses.

Derrek Gafford

Well, with skilled services there were some opportunity there, and we’ve made some nice opportunity. CLP has always had a very safety-driven culture, just like ours, and with a tuck-in underneath, CLP would be skilled services. There are few unskilled CLPs operating practices in that same culture. But there is probably some opportunity there but it’s not the high accident business. The frequency there is much lower than we’ve seen at our other brands.

And with PMI, they’ve done a pretty good job. We’ll just have to understand more about what we can decrease as we get further into actually owning them and deeper into their practices. But I think there’s some opportunity there.

Clinton Fendley - Davenport & Co.

I know you gave us the differential between the bill rate and the pay rate changes. Did you actually have the individual components?

Derrek Gafford

Bill rates increased 1.6% and pay rates increased 3%.

Clinton Fendley - Davenport & Co.

Could you just comment on your outlook for share repurchases from this point going forward?

Derrek Gafford

Well, when we talked about the use of capital we’ve always talked about it from two perspectives, Clint. And we’ve weighed the opportunities and the ROI of acquisitions and that against share repurchases. So, we will continue to evaluate share repurchases based off of ROI of acquisition opportunities that come along and if there aren’t any acquisition opportunities that make our ROI threshold that would be our second option.

Clinton Fendley - Davenport & Co.

And did the acquisition sort of prevent you from being more active this quarter than you would have liked?

Derrek Gafford

Well, it’s hard. Once we get involved with an acquisition and we start negotiating and talking through a purchase agreement, really at that point we’re blacked out. We black ourselves out. We consider ourselves having material information, so we didn’t have much time this quarter to take a look at share repurchase, with the PMI transaction.

Operator

And the next question comes from the line of Mark Marcon of Robert W. Baird.

Mark Marcon - Robert W. Baird & Co., Inc.

With regards to PMI, what sort of margins were they running?

Derrek Gafford

They were running mid-teens on the gross.

Mark Marcon - Robert W. Baird & Co., Inc.

And operating, or EBITDA?

Steven C. Cooper

We haven’t disclosed that by brand for a while but Mark, this business looks a lot like our Spartan business when we first purchased it. In the fact that both the gross margin level and the operating margin level, we felt we could get those margins up. And sure enough, in the first three years of ownership of Spartan, we moved the gross margin level up approximately 4% and we’re quite pleased with that.

I’m not sure about that kind of opportunity here, because Indiana looks much different than Florida looked as far as what kind of clients we’re serving there. But we do believe we have the opportunity to move the gross margins up and, like I said, as we expand this business this gives us a great platform. We do believe that the operating margins will be strong here. They may not match the Labor Ready margins, but they’re still good margins.

We’re going to stay very focused on retail type business, small to medium customer type business, and it will look different than the large, national account type business.

Mark Marcon - Robert W. Baird & Co., Inc.

So right now they’re primarily small and medium size business?

Steven C. Cooper

They serve a lot of large accounts for being such a small company.

Mark Marcon - Robert W. Baird & Co., Inc.

Oh, they do serve large accounts right now?

Steven C. Cooper

They do. Being there in Indiana they serve the auto industry quite heavily, the foreign auto industry and other manufacturers. We believe we that have the opportunity to move this business more into a distribution and other services that we’ve been successful with in the other parts of our business and move those margins up.

Mark Marcon - Robert W. Baird & Co., Inc.

And where would the opportunity for synergies be, if you’re working with small and medium size businesses with Spartan?

Steven C. Cooper

The synergies between Spartan and PMI?

Mark Marcon - Robert W. Baird & Co., Inc.

Yes. Or PMI in general.

Steven C. Cooper

The first is that we just needed to get some economies, some size going here. When we bought Spartan it only had nine offices and we knew that we wanted to make a significant dent in this niche here, of service and light industrial type businesses. The nine offices aren’t very much when we’re a national on our other businesses.

So we’ve been opening offices. Well, you run into the dilution problem there on having so many young offices and so that strategy wasn’t going to hold up on a nation-wide basis. It helped to expand Spartan in the Southeast and got us a good foothold, but at some point in time you start diluting earnings and you don’t have strong enough relationships.

So, this next step does two things for us, it gives us some great tenured leadership with the managers that we’ve welcomed to the team. And it gives us a stronger support structure that we had not built up around Spartan as they grew from 9 to 32. We were supporting them out of our Labor Ready operation. Now we have very specified support structure just for our small light industrial clients so there starts to be some synergy there.

So it’s almost reverse that rather than build up a support structure for Spartan, it was already being paid for through this PMI deal and now we can support the 32 offices of Spartan through this PMI deal and together these 74 offices now we have a platform that we can start growing from.

So it’s very strategic at this point in time, that’s why it’s not driving the earnings impact that a Plane Techs, or even when we bought FTP a year ago, how we tucked it under another strong platform.

And as I mentioned we did this platform with 74-strong leadership team and the support structure, from there forward new openings, especially new acquisitions, do become stronger faster because we can take more support structure cost out as we grow this. So this is a very strategic move at the right price with the right team and the right culture that fits. And we’re quite excited about it for those reasons.

Mark Marcon - Robert W. Baird & Co., Inc.

I’m assuming you’ve been working on this for a while. Now that you’re seeing the same branch revenue trends, in terms of the clients accelerate, are you just going to focus on integrating your current acquisitions and hold off on any new ones until things stabilize or are you going to keep looking at other things as well?

Steven C. Cooper

The last four weeks have been quite confusing, chaotic, and uncertain, not just for TrueBlue, but for the market in general. I don’t have a very strong answer there for you, Mark. It really depends. If things stayed on the current trend, it would absolutely be, “Shut the pipeline off.” And so that’s that side.

Mark Marcon - Robert W. Baird & Co., Inc.

We would like to see it hold up until things stabilize.

Steven C. Cooper

I think that makes sense. As I mentioned in my prepared remarks, our current focus is all about integration and optimization and nothing is going to get in the way of that. We have a lot of costs that we can leverage going forward and I would do this as a preparation time. This downtown in the economy that we can do this preparation work in the structure that we’ve built.

We have been quite aggressive the last year, where we’ve formed these deals, built out these platforms, and renamed the company. And it’s all been good strategically and this short-term execution problem is going to give us this opportunity to say, “Okay, brakes on longer-term issues, but let’s focus on the integration, the optimization, and make sure we’re caring for our current core business.”

Which, I just want to give you the assurance, it is being handled by different teams, so the team that runs the Labor Ready business, which is our legacy business, our core business, is really being focused on by a team that’s been here for a lot of years and they have not been distracted one bit by these acquisitions that we do. So the teams have been kept separate and I don’t believe that’s caused any of our issues.

Mark Marcon - Robert W. Baird & Co., Inc.

Along the lines of the declines in same branch revenue are you seeing an accelerating pace of price competition?

Steven C. Cooper

I don’t know about accelerated level as we’ve seen the fall-off in demand the last four weeks. But definitely we are in a stage of the downturn where smaller competitors, especially, are gasping for air and it feels to them like price cuts is the best thing to do. And that does come into play, why the revenue falls, because while they’re gasping, we tighten our belts and we don’t follow that leave.

We believe that protecting our margins is very important and we will do what it takes first to protect that and still take care of our current customers and work through their current short-term issues with them.

But we’ve got some value here that others don’t bring. We have a strong compliance culture here, a proven track record of working with governmental agencies; have proven out our compliance with both the Department of Labor on wage and hour, the EEOC. And now entering a partnership that’s going to be very strong and announced soon with the group that used to be called the INS for immigration (now called ICE) that we’re going to be one of the leading partners in helping them out.

This strength of a compliance culture and a compliance company, there’s a lot of our customers that recognize that and while smaller companies are gasping for air and first go to price moves, they know that they can’t replicate what we bring them. Especially as immigration tightens up and you hear day after day raids that are taking place and companies are failing on their compliance. We will not fail in this area. And that’s going to be a stronghold for us going forward.

And so we’re going to make sure that we are and if we have to give up a little revenue along the way we will, but we will remain the compliance leader and the strength that the marketplace needs.

Mark Marcon - Robert W. Baird & Co., Inc.

With regards to the worker’s comp, did you give us the worker’s comp accrual reversal for this quarter?

Derrek Gafford

This quarter it was about 140 basis points of revenue.

Mark Marcon - Robert W. Baird & Co., Inc.

And you mentioned earlier, Steve, that you’re going to look at potential steps that you can take to generate even more savings. Would that be both in the field as well as at various corporate headquarters, or where would the potential savings, what are some of the things that we should think of that you could potentially do?

Steven C. Cooper

Well, the first is watching the revenue per branch and treating every branch as if it’s our only branch and making sure that we have the right reports, especially on payroll cost on a every two-week basis as we key this each month. And watching the expense controls of every branch.

And the hardest thing about a downturn is you can’t predict which branch, which customer, is going to impact you next. So, some would like to feel, or it would be a nice dream, if we had a crystal ball to say we know exactly what state, and we know exactly which customer is going to impact us next. But we don’t.

Therefore, you hang on and you fight with every branch you have open. On the very long-term basis, you fight a short-term issue.

Time in and time out we see branches suffer and large customers stop using temporary labor and we continue to make a decision every month about the long term nature of that branch. And if a certain amount of revenue has dried up we will look to consolidate it with a neighboring branch or just pull it out of the market all together. And we can’t make those calls ahead of time. We have to just make them timely as we see the data coming in.

The payroll information, we can make those decisions every two weeks because we see where the revenue trends are and how many employees are working in each branch, so that’s how we control costs first and foremost at the branch level.

As far as corporate support goes, there is a little bit of leverage we can pick up just in ongoing operations. But a longer-term project and it’s integration and optimization words that we’ve been using, because we pull these platforms together and we get everybody on common systems, which will take us 12-18 months to work through. There is a significant amount of leverage you can pick up here, Mark.

It’s hard to quantify right now as we start working through it, but we do have the vision to run these multiple brands as one company, under one system, with one process, and really get the leverage out of this network that we dream of. And that’s where Derrek says more to come on that because it hasn’t all been quantified. But that’s where the real vision and dream comes from, is of operating these multiple brands, is putting them all on a common platform.

Operator

And from BMO Capital Markets, your next question comes from Jeff Silber.

Jeffrey Silber - BMO Capital Markets

Just to go back to the decline in your same brands revenue; was it more of a pricing issue than volume? You mentioned the competitors being a little bit more price aggressive.

Steven C. Cooper

Over the last four weeks, no. It doesn’t appear that we just dropped our prices because of that fall off. This is definitely a volume issue.

Jeffrey Silber - BMO Capital Markets

Is it your existing customers coming back dramatically, are you just not adding new customers like you were a year ago or a combination of both?

Steven C. Cooper

It’s hard to tell, it’s such a short-term thing. We haven’t had a chance to totally analyze all of the trends branch by branch, and what might be causing it. But really what happens here, Jeff, is that Labor Ready is so project-oriented that only about 50% of the revenue in any one given year comes from existing customers. That means customers that used you in the previous 12 months.

And so that’s why Labor Ready always feels the downturn first. They always have to be selling and finding that new next project. And so Labor Ready felt it first, that’s got us reacting and moving. I made a comment a little earlier that we have noticed that not only our other brands feel it on a delayed reaction, but the staffing industry as a whole feels it on a delayed reaction on what Labor Ready feels it because of 50% of our revenue comes from selling into new projects at all times.

So knowing that history repeats itself, it’s somewhere in that category, Jeff, that, yes, these last four weeks is probably not a lot of people are buying.

Jeffrey Silber - BMO Capital Markets

Assuming that the PMI acquisition does close at the end of this month, what should we be looking for depreciation and amortization in 2008?

Derrek Gafford

The amortization is about $300,000 a quarter, and there will be a minimal amount of depreciation.

Jeffrey Silber - BMO Capital Markets

If you could just remind us, I don’t know if you had given guidance for the year as a whole and then we could just add that incrementally.

Derrek Gafford

We haven’t given any guidance for the year. There’s an assumption stage that’s out with our 8-K that’s put out that gives a DNA number for the year of $8 million.

Jeffrey Silber - BMO Capital Markets

That was with your 8-K just filed tonight?

Derrek Gafford

Yes. And that’s got all the key assumptions on there. It does not include PMI. So what I’ve just talked to you about on PMI as far as the quarterly amortization rate, if we close that transaction, you would need to add that into your assumptions.

Jeffrey Silber - BMO Capital Markets

Will that have CapEx guidance as well? Or CapEx assumptions?

Derrek Gafford

Yes, it does.

Operator

And from Merrill Lynch, your next question comes from Michel Morin.

Michel Morin - Merrill Lynch

Does the second quarter outlook include any consideration for a potential cost reduction that you alluded to, Derrek?

Derrek Gafford

Nothing that we hadn’t been working on previously. So as we moved through the fourth quarter there were some projects that we worked on as far as the cost structure, there are some things that we had already initiated prior to four-week trend that we’ve seen, but we’re still reevaluating from this four-week trend additional actions that we want to take.

Michel Morin - Merrill Lynch

Can you talk a little bit about those trends on a per segment perspective? By trends the revenue or same source sales trends is it across the board? Every segment including CLP, which are experiencing a change in trends?

Derrek Gafford

I’ll talk about the trends, broad-based from an end market prospective. More focusing on Labor Ready just because we get the data more timely in this last four-week trend. It hasn’t given us a lot of time to slice the data for all of the brands.

But if we were to take a look where trends were running in January and February and then we take a look at the last four-week period and say what were the main things. There are a couple others that I would point out where while we’ve seen the broad-base across multiple end markets. Manufacturing took a hit, services and other took a hit. Those were probably the main two areas that took a hit. Transportation a little bit, too.

But we saw an acceleration virtually in every end market during that four-week period versus the comp trend that I was talking to you about in January and February.

Michel Morin - Merrill Lynch

So actually things like commercial construction are they still going well?

Derrek Gafford

Commercial construction has been interesting. It for us has been following more as a trend in the Labor Ready brand based on whichever geography we’re in. So if a particular geography is down and other end markets are down, construction has been down.

For CLP, commercial construction has actually been growing for them. So they’ve been offsetting the hits that they’ve been taking on the residential side with actually growth on the commercial side.

Steven C. Cooper

For the most part, Michel, this last four weeks wasn’t construction driven. It was probably the ancillary support structure around that and just the economic issues in general.

Michel Morin - Merrill Lynch

And just quickly on Plane Techs and on the contribution from M&A, is Plane Techs performing as expected?

Steven C. Cooper

Well, that business when we were in the middle of due diligence, it was ramping up nicely as it was and it has continued to ramp up nicely, so it is ahead of expectations. No doubt, when we withdrew due diligence last, at the end of the third quarter and the first part of the fourth quarter of last year. So, yes, we’re very pleased with the way Plane Techs is performing and it’s continuing.

The open orders almost matches as many people as we have placed. We have 1,300 mechanics placed. And we could place that many more as we find mechanics. That’s really what this whole business profit is built around, its systems and the team that we have doing the recruiting of mechanics. They have filled a lot of orders in the last quarter and that’s driving the revenue rate even further, but that’s the game, is finding the mechanics.

Michel Morin - Merrill Lynch

And in terms of your guidance, you’re including 12% from M&A in the second quarter, down from 15%. Is there a specific reason why there’s that deceleration going on?

Derrek Gafford

Well, when we anniversary skilled services in the second quarter so it’s not a sequential deceleration from any of the acquisitions we’ve bought. We’ve just hit the one-year anniversary in the second quarter of skilled services.

Operator

Your next question comes as a follow-up question from TC Robillard.

TC Robillard - Bank of America Securities

I want to follow up on the non-res construction. What do you think is the reason that you’re seeing growth coming in CLP, because a lot of the broader based data that you see out of the government, while it’s still growing you’re seeing a deceleration in growth?

If you look at your CLP brands, are your growth rates accelerating or decelerating? I’m just trying to get a sense if you are gaining share, if you just happen to be in regions where there’s bigger, non-res projects, just a little more granularity there.

Steven C. Cooper

I think most of it has to do with back log. That going into the downturn we had plenty of back log at CLP and small contractors and commercial projects had it. I don’t have a good indicator in whether that back log’s drying up or not but my gut would tell me it is. And so we’ve still been servicing that and still we saw an opportunity to do that.

Where’s there’s a longer period of downturn in residential, we’re seeing the trends in commercial start to fall off. So that’s where my gut feeling comes from. And Florida and California that have been hit by residential construction the longest, we’re almost coming up on two years since we started announcing the falloff of construction in Florida. And it takes about that long and we’re seeing the commercial construction in Florida be hit pretty hard.

We’re not on our two-year anniversary yet for California, but it’s definitely over a year. And so I think that’s kind of trend that we’ll see there. It’s hard to get a deeper grasp on that.

You have to understand the size of construction sites we’re working on, even though they’re commercial, we’re not working on roads and bridges and big tall buildings These are remodeling shopping centers and remodeling multi-unit or building multi-unit housing, which has still held up fairly strong even though single residential housing has been weak. But people have got to live somewhere so it’s either going to go into multi-unit or it’s going to go into single family and this is where we rebound.

Operator

There are no more questions in the queue.

Steven C. Cooper

We appreciate your continued interest in TrueBlue and the questions that have been answered here today and your attendance on this call. Thank you for your participation.

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Source: TrueBlue, Inc. Q1 2008 Earnings Call Transcript

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