Barrett Business Services Inc (BBSI) 2005 Q2 法說會逐字稿

Good afternoon. My name is Aileen, and I will be your conference facilitator. At this time I would like to welcome everyone to the Barrett Business Services second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Mulholland, you may begin, sir.

Thank you. Good morning. This is Mike Mulholland with Bill Sherertz. Today we will provide you with our comments regarding the Company's operating results for the second quarter ended June 30 and our outlook for the third quarter 2005. At the conclusion of our comments we will respond to your questions.

Our remarks during today's conference call may include forward-looking statements. These statements, along with other information presented that are not historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Turning now to the second-quarter results, as reported, the Company earned $0.31 per diluted share in the second quarter as compared to $0.20 per diluted share for the same quarter last year. These results represent an increase of 55% on a quarter-over-quarter basis. Page one of our release summarizes our revenues and cost of revenues on a net basis as required by GAAP.

Our comments this morning, however, will be based upon gross revenue information for the reasons that we set forth in our release. Total gross revenues for the second quarter of 183.6 million increased 42.9% over the 128.5 million for the second quarter of 2004. Additionally 2Q '05 increased sequentially 16.9% over Q1 '05, which was the largest sequential gain in six quarters.

Staffing revenues for 2Q '05 rose 17% over the same quarter last year. PEO gross revenues for it 2Q '05 increased 51% over to 2Q '04. California PEO gross revenues for 2Q '05 increased 53.1% over 2Q '04 increases, and gross PEO revenues on a Q2 over Q2 basis for all other regions ranged from 29.6% to 64.3% which we believe underscores the strength of the value proposition of PEO in non-worker's comp sensitive markets.

Turning to gross margin, a slight decline in gross margin percent for 2Q '05 as compared to 2Q '04 primarily reflects the increasing shift in the mix of revenues towards PEO, which for 2Q '05 was about 80.5% of total gross revenues.

Worker's comp expense for 2Q '05 of 7.9 million or 4.3% of gross revenues continues to reflect favorable results from our underwriting standards. SG&A expenses of 6.3 million were 3.4% of gross revenue.

Turning now to our balance sheet, cash and marketable securities totaled 27.2 million, up approximately 10.4 million in the six months since December 31, 2004. Trade Accounts Receivable at June 30 totaled 36.4 million while up sequentially over recent quarters. DSO or days sales outstanding and receivables remains very favorable at 16.7 days.

Our current ratio and working capital at June 30 both improved over the March 31 quarter. As reported in yesterday's earnings release for the third quarter of 2005, we are expecting total gross revenues to range from 198 million to 201 million, an increase of approximately 38% over 3Q '04. Historically the third quarter of each year is our strongest in terms of revenues and earnings.

We anticipate diluted earnings per share for 3Q '05 to range from $0.35 to $0.37 per diluted share, which includes the approximate effects from our recent equity offering. Our expectations for 3Q '05 represent an increase in earnings per share of approximately 33% over 3Q '04. As we also reported, our guidance for 3Q '05 diluted earnings per share, excluding the effect of our recent equity offering, would have ranged from $0.40 to $0.42, an increase of approximately 52% over the split adjusted results for 3Q '04.

At this time, Bill Sherertz will comment further on the recently completed second quarter, as well as our outlook for the third quarter. Bill?

Thanks, Mike. All regions were up from a low of 8.9% in mid Atlantic to a high of 60% in our Portland region here. During the quarter we signed 73 new PEO clients and 16 left our fold so to speak. Two left on their own; the other 14 were either risk issues or credit issues, and most of them were fairly small.

The pipeline remains very full. No change from the past two and a half years as we have the ability to monitor what is coming at us. And as we indicated in our press release, our third quarter we should have our first $200 million quarter in the third quarter. After all, we are a third into it. As you know, that looks very positive.

We continue to build cash, and the Company is in a great position for expansion. Acquisitions are being presented to us. Most of them don't fit, and we're bearing very selective.

Staffing was up 17% overall with Southern California down 27% overall. However, the PEO business in Southern California was up 58.6. The other decline in staffing was mid Atlantic region which was down 9.6, but a gain in PEO was up 64.3 or the highest gain of all percentages in the Company. In Portland in particular in the staffing we were up 97% year-over-year with the PEO up 29.6% as well.

So in general we had a very good quarter. We have great momentum behind us, and there are lots of opportunities for us.

With that, I will open it up to questions.

(OPERATOR INSTRUCTIONS). Jeff Martin, Roth Capital Partners.

Could you give us an update on how your new offices are going? I think you opened a new one in Bakersfield recently and then split an office up in Napa?

Well, they are both doing well. Bakersfield we signed a really nice customer there, and he has got some good leads on some others, and he just -- we just got office space. He was helping us out in Stockton for a while. The Napa Fairfield, we are very pleased with that. Fairfield continues now that it is solely its own branch with Rick being the manager there. He has been doing very well signing new accounts. David, who is in the Napa branch, is just starting to get into the PEO business. The Napa branch is 100% staffing at the moment; however, we already have some good leads and we will be moving forward, so they are doing fine. We are pleased with them.

Great. And what kind of customers do you characterize Bakersfield as going after? I think it is partially construction and homeowners, but what -- (multiple speakers)?

Well, actually you we signed a (inaudible) dialysis center there, about 135 doctors, nurses, that kind of thing. That is what we started with, and we had some leads on some other kinds. So far we have not even tapped into the construction side.

Okay. And how about the Arizona market? How is that developing? I assume you have got your self-insured license there?

No, we are not. We don't have enough business to be self-insured there. It is a chicken and egg issue. We need to buy somebody there or increase our staffing business to become self-insured.

Okay. Could you give us a timeline on how you think Arizona will play out?

Well, Jeff, it's all a matter of finding the right player, and now we have three full-time recruiters looking for us, and if we find the right person or the right acquisition, we will move very quickly.

Great. And then in terms of worker's comp claims trends, could you give us kind of a relative perspective how was it in the quarter and maybe trailing 12 months versus the year ago period?

Claims frequency is down year-over-year. Cost of claims has been down as well, and I am talking mostly about California, although it is pretty much across the board. It has been very benign in terms of costing and frequency both.

And what about the rate of accrual historically? Do you think that will have to change in the future?

As far as the workman's comp accrual goes?

Right.

We will continue to be very conservative on that number until people stop us from doing it.

Okay. I've just seen some of your competitors have to bring down their accrual rates.

Well, you know, that could be one of two things. You know either, one, they are trying to make numbers, or two, their experience is a lot better. It's a hard deal. Overall what I see on the workman's comp from if you are picking your customers very carefully, that your experience is a lot better, so let's hope that is what they are doing.

Okay. And I believe you were recently speaking about potential entry in the Nevada market. Can you give us some detail there?

Again, we would like to enter the Nevada market with an acquisition, but that won't prevent us from doing that. It is a matter of finding the right players. We are working on -- that is something we work on every day.

Great. I will circle back around. Thanks.

Yes, the good news about us working on those things, we are not out putting fires every place else.

Exactly. Thanks, Bill.

Leonard Lee, The Seidler Companies.

Good morning. Great quarter, guys. I just wanted to start off, it is great to see that non-worker's comp states, the PEO business seems to be growing pretty well. But as it does relate to worker's comp and specifically in California, since that is probably still what is driving the boat, I just wanted to get a feel for how it has been some time now since the worker's comp regulations have been put into place, and I just wanted to understand how given that you have had your HCO network set up all along, how are you impacted by the regs? Are you able to do in any material amount decrease the cost to treat claims, or is that a phenomenon that exists primarily with the non self-insured guys?

You know, that issue about the new laws and decreasing the cost of claims, that is such a long-term deal, that will play out over five or six years. Now the real deal I think is the unemployment number. As unemployment, particularly in state, stays relatively around where it is at and you don't have to choose people who maybe would like to commit fraud and deal in a market of where you cannot find people, I firmly believe that unemployment is the driver of workman's comp costs. And so as this country continues to try and drive unemployment down where we are employing the unemployable, I think that you're going to see the reverse happen in California and other states as well and mostly in terms of fraud. Not so much in terms of the medical side of the claims or the frequency of legitimate claims.

I think most of the issues are related to fraud, and as you choose better employees, you have the opportunity to choose better employees, you have better wages, better benefits, the instance of fraud goes way way way down. I can tell you from my own experience here in the worst years that we had with profit it was almost all fraud. And as we have chosen our customers very carefully, the fraud instance in our Company is very very very small. But the accidents we do have are real. I mean you know when a guy breaks his arm, it is pretty hard to fake it.

Your ability to decrease cost is more related to cutting out fraud due to -- as a result of internal measures as opposed to there being changes regulatory-wise?

I believe that. I think, number one, if you can control fraud, you can control your cost.

Okay. And I guess just in that context, the rest of the industry which has not been as successful I don't think as you guys in terms of cutting out the fraud, I think the rest of the industry has been assisted pretty generously by the regs, and I guess as it relates to the declining worker's comp rate market, as we have talked to some brokers with rates coming down at the pace that they are, are you seeing perhaps brokers maybe on a relative basis emphasizing the insurance more so than the PEO just because there are many insurers that are really dropping rates at double-digit rates right now?

Well, remember we drop rates along with everybody else. But our safety incentive is still going to save a company a third of their premium no matter what the premium is. And that is the big attraction in terms of a comp market. So rates are still very high relatively speaking to the rest of the world down there. Whether or not they come down 14%, which they did, we had the biggest signing quarter that we have ever had in the second quarter this year, and they are probably going to go down another 5% -- whoopee -- the first of the year.

Now we don't see any effect. If anything, we have actually seen it start to increase because I think people word-of-mouth, the referral business is now almost 25% of our business, and it's a bigger issue than comp. The comp is an attractant. It gets people to talk to you, but it is the human resource piece, the HR piece that we deliver that really brings it to the forefront as a total package.

Okay, great. In terms of the various verticals within your PEO clients, are you seeing any particular trends there? And then also with respect to your PEO growth, are you seeing it come more from new clients added or hiring within clients?

Well, it is definitely coming from new clients added. And you know, I don't see -- I said all along the economy is very good, and it remains that way in all areas. I think that the government is probably smoking something when they are putting out -- when they put up these issues about the economy slowing down. I don't see it.

Okay. And just a couple of more and then I will jump back in. With the new deal and the bolstered balance sheet, how -- can you provide a general quantification as to how that changes your surety bond requirements, or in the case of California the fee that you have to pay to maintain self-insurance?

Well, it may have some effect next year on the fee in California. The rest of the states is the formulized based on your reserves and administrative costs. So it will have absolutely no effect on the rest of the states. It certainly will make it easier for us to go into other states if we would like to be self-insured. And in California, they just simply rate you as to your financial strength, and then they assess you a fee based on that financial strength.

Okay. So, I mean -- --?

But it is not a big number.

Okay.

I think we are paying 300,000 this year or something. And so you know, if it goes down 100 or 50 or something, it is immaterial.

Got you. And then lastly, the mid-Atlantic region, does -- I guess just an update on what your plans might be there and does -- is the recent deal maybe change your strategy there to maybe shift toward trying to build that out versus possibly selling that? Or is there any change at all there?

Well, again, we probably would not do a major acquisition in Kansas City, but we certainly would look at the East Coast and the West Coast as well. We will just take advantage of what the best opportunities are for us. The druthers would be Colorado, Nevada, Phoenix, Utah because it is relatively close to what we are ready doing. But if we were to find the right thing to kind of fill out the East Coast, we would do that as well.

Do you have self-insurance licensees in any of Utah, Arizona, Colorado or Nevada?

No. Don't necessarily need it.

(OPERATOR INSTRUCTIONS). Tony Trissani (ph), Astro Capital Management.

I have a question on the PEO. It looks like your gross adds in your customer base, it looks like it is accelerating. Can you talk about -- I mean the gross adds are up maybe 20% sequentially from Q1 to Q2. Can you talk about what is happening there? What dynamic -- why it is accelerating? Because you added risk managers? Are you adding new brokers, etc. to the pipeline?

Well, Tony, I wish I could tell you I know. I think it depends more on the quality of the customers that are being presented to us than the quantity. So when we have a signing period like we just did, I think it had to do more with the quality of what was being presented to us as opposed to the quantity. The quantity has been going up steadily. It is the quality issue that we choose to do business with that really determines the signing percentages that we have.

Okay, it looks like a good trend. And are you still adding -- are your PEO customers on average somewhere around 45 to 50 employees per new client?

I would say that as an average that is not bad. When I throw out a number like 73, actually the number was 83, but there were some duplicates in there and there were some one-offs in there. And so you have to be a little bit careful with these averages. In a quarter in which we have two or three really big guys that got a couple hundred a piece and then you saw well what about the rest? But in general our customers are much bigger. Just like the one in Bakersfield. That was 135 people.

Okay. And do you see a dynamic in your PEO business as you're getting larger in that business? Is there organic growth in the customer base one, since you're adding more work site employees? And two, are they seeing average wage gains, and does your fee -- is your fee based on the average wage base of that client?

Our fee is not. It is a fixed fee structure. I would say that I have not seen any huge wage increases. I think our organic growth is basically coming from new customers, not from our present customers increasing. Although at this time of the year, this will be the busiest time of the year for all of our customers. There is a lot of over time, longer days, a lot of economic activity, not as many holidays. So third quarter, late second quarter, early third quarter will be the busiest time. So you know just the average number of hours worked would go up.

Right, I understand. Okay. I guess the last question is there -- your pricing seems to be at the lower end of some of your competitors. Do you evaluate your pricing, and do you guys typically do annual price moves on your PEO fee?

We evaluate our customers all the time. However, in terms of increasing or decreasing administrative fee, it is totally determined on how much work that we have to do at a customer. So it is kind of rare that we miss the mark. I'm very happy with the profit out of the money we are taking to the bottom line. We are not getting as much as others, but I think we are a very efficient provider, and I think that is the name of the game. And I've said that if those guys want to go out and sell it for $2000 per person per year, it is building a field for me, great for them.

Okay. And I guess the last question is your SG&A, I mean the last few years it has shown to be very scalable, and you have commented before that you have more capacity in your systems, etc. What would you say -- how much could you grow the headcount or client base kind of with your existing infrastructure? And is there more SG&A leverage?

There is a lot more. We are probably -- you have to take out the three really big branches to start with because I cannot ask them to double or -- they are already at 100 plus million run-rate.

But the rest of the Company, you know, probably is about a 50% capacity. You have scalable SG&A, you're going to add more risk managers and more HR people, but you know there is tremendous leverage when you do that. So you have got out of your admin fee, you are maybe spending 25%, so it's like a 3 to 1 ratio.

Okay. That is all I got. Thank you very much and great quarter.

Mike Niehuser, Robins Group.

Great quarter. Just going back to a comment about the national economy, I just wondered if you could comment on what you are seeing going from a temporary to a full-time staffing and placement if you can comment on how that might reflect where the economy is headed?

Well, in the economic cycle what happens is they start using a lot of staffing people. Then they decide that the economy is strong enough that they want to convert some of those people to full time, and then as the economy starts to get even faster, they start going to permanent placement or willing to pay fees. My guess is we are in that third stage. We're seeing more permanent type fees. People are starting to get a little harder to find, and that makes sense. We will see what the unemployment number is on Friday, but my guess is it will be below 5.

And generally how might that vary from region? Is there some general comments there?

We have not seen much variance in the region. I think it is pretty widespread. I don't know much about the Midwest, but the West Coast is doing very well. You heard me say that Portland was up 97%, and our East Coast is, other than the staffing part, which is sort of a none event for us back there, the PEO is up 64%. So at least where we are it is pretty even across the board.

Leonard Lee, The Seidler Companies.

Just a couple more. Regarding complementary business acquisitions, what types of things might you consider?

Well, my experience with buying PEOs or looking at PEOs has been something that I am not a big fan of. Because if we are only signing two out of 10 and you offer me a company that has 150 or 200 or 100 PEO clients, I am going to only end up with two out of 10 again, probably, most likely.

Most of the smaller PEOs sign up the bottom of the trail. That is where they live. That is where the PEO world has lived other than the three of us now, which -- and maybe the five of us -- which have kind of broken away from that model. But to buy a regional PEO, I think if you look at (inaudible) has bought several of them, and they are lucky to keep 50% of the business. Good for them, probably rightly so.

Are there non-PEO or staffing businesses that you might consider acquiring whether they be -- they sort of build your service portfolio through IP offerings or what not? I'm looking at the prospectus, and it mentioned complementary businesses, so I just wanted --?

Well, staffing, you know remember we're primarily a staffing company, and we are not going to get out of that business. I think it is the combination that really makes the engine hum. And I much more comfortable with buying a good staffing company that has a good reputation, has good market presence and talent. That is what we are looking for.

And then a balance sheet question. With 22 million in cash as of June, I just wanted to get a sense as to what -- if that is a fair normalized figure, it looks like the accrued payroll number is pretty high at 31 million. Is there -- obviously there are a lot of ins and outs in that cash number. But as of that date, is that a pretty normalized number, or is a little inflated because of the payroll?

I would say it is not an inflated number whatsoever. You know, when you look at the sequential change in cash from March 31, and I'm talking cash and marketable securities combined -- at March 31, we were 25.3 million; June 30, we were 27.2 million. That is just a slight increase. And when you look at the principal ins and outs for Q2, we made about $7.7 million in tax payments. 6.2 million of that number being 1Q payroll taxes which were paid on April 30. And then we also had during the quarter another 1.5 million in estimate payments for corporate income taxes.

So we will continue to have those sort of major inflows and outflows as the quarters roll along, but the underlying cash generating ability of the Company's operation will continue to increase the cash balance and the free cash flow being generated by the business.

Well, remember that staffing is typically 30-day terms, and our staffing right now is running full boar. So you're going to see our receivables, particularly in the summer and fall months, probably go up, which would be just a very natural occurrence.

Okay, great. And then my last question is regarding the building purchase. I guess if you could just provide an update as to where that stands?

It looks really good. We're going to pay $8.8 billion for it. As it turns out, it looks like the building is completely full. We will earn about 6% on our money, some of it sheltered, and we get free rent out of it.

Okay. So I take it there will not be a mortgage on that building, right?

Well, probably not at the very start, but certainly we could leverage that if we wanted to. Right now it is earning much better money than our 3.4.

Right, okay.

If we wanted to tap into that for an acquisition, we would not have to -- I don't think we would have any problems mortgaging that building in a heartbeat.

Right. Okay. Great. Thank you.

At this time gentlemen, there are no further questions.

Well, thanks for you all listening, and we will do this again. These are much more fun than a couple, three years ago. So, thanks very much, and we will see you third quarter.

Ladies and gentlemen, this concludes today's Barrett Business Services second-quarter earnings conference call. You may now disconnect.