Barrett Business Services Inc (BBSI) 2007 Q4 法說會逐字稿

Good Afternoon, my name is Beth and I will be your conference operator today. At this time I would like to welcome everyone to the BBSI fourth quarter earnings call. (OPERATOR INSTRUCTIONS) Thank you.

Mr Sheretz, you may begin your conference.

Thank you. Good morning. This is Mike Mulholland with Bill Sheretz. Today we will provide you with our comments regarding the company's operating results for the fourth quarter, ended December 31, and our outlook for the first quarter of 2008. 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 fourth quarter results. As reported, the company earned $0.34 per diluted share in the fourth quarter, as compared to $0.45 for the same quarter in 2006. The decline of $0.11 per share compared to the comparable 2006 quarter was due solely to higher than anticipated workers' compensation claims costs. For the full year, the company earned $1.44 per share in 2007, which compares to $1.40 per diluted share for 2006.

Page one of our operating results summarizes the company's revenue and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles. Our comments today, however, will be based upon gross revenues and various relationships to gross revenues, because management believes such information is more informative as to the level of our business activity, and more useful in managing our operations. Comments related to gross revenues have no effect on gross margin dollars, SG&A expenses, or net income. Total gross revenues for the fourth quarter of $293.8 million increased 7.3% over 4Q '06. Excluding the benefit from the July acquisition of Strategic Staffing and the December 3 acquisition of Phillips, organic growth for the company on a quarter-over-quarter basis was up 2.3% for total gross revenues. Staffing revenues for 4Q '07 increased 39% over 4Q '06. On an organic basis, staffing revenues declined 2.7%. PEO revenues grew 3% in 4Q '07 as compared to 4Q '06.

Our two acquisitions in 2007 were staffing companies, thus, growth rates for PEO revenues are on a comparable branch office basis. We continue to be very pleased with the financial performance of Strategic Staffing. All operational transition issues are well behind us including the December acquisition of Phillips in Denver. Total gross revenues for 2007 of $1.12 billion increased 7.2% over 2006. Staffing revenues grew 19.2% for the year, and on an organic basis, staffing revenues declined 1.9% as compared to 2006. 2007 PEO gross revenues increased 5.6% over 2006. Gross margin percent for 4Q '07 declined 46 basis points, compared to 4Q '06, a lower direct payroll percentage was more than offset by higher workers' compensation claims costs. 4Q '07 SG&A expenses of approximately $10 million or 3.4% of gross revenues were up over 4Q '06, due principally to nine additional offices from our two acquisitions. Our effective income tax rate for the year was 35.2%.

Turning now to the balance sheet at December 31, cash and marketable securities totaled $64. 9 million. The decline from a year ago was due to the $13.5 million paid during the year for two acquisitions. Receivables of $36.7 million at 12/31/07 increased over a year ago, due in part to higher revenues in December 2007, compared to December 2006 and a slight increase in DSO, or days sales outstanding, and receivables from 10.7 days to 12 days. The material increase in goodwill on the balance sheet simply reflects the two acquisitions for the year.

Turning now to our outlook for the first quarter of 2008, we are expecting gross revenues to range from 263 to $268 million for the quarter, which equates to an approximate increase of 3.1% over 1Q of '07. In addition, we anticipate diluted earnings per share for the first quarter of '08 to range from $0.08 to $0.12 per share, as compared to $0.15 per share for 1Q '07. These earnings projections incorporate the effect of an increase in the California unemployment tax of approximately $600,000 on a pretax basis, which equates to approximately $0.03 per share. This incremental expense primarily affects the first quarter, as the California unemployment tax only applies to the first $7,000 of wages. The current economic climate warrants a very cautious outlook as we move further into 2008. At this time, Bill Sheretz will comment further on the recently completed fourth quarter as well as our outlook for the first quarter of 2008. Bill?

Thanks, Mike. During the quarter, we signed 71 new customers in the PEO sector. We also lost 44, were cancelled. Ten were sold or had no more business. 12 left because of AR or risk issues and 22 left on their own volition. 25 of the 44 left in December, which is one of the higher December cancellations I've seen in a long time. Signings in the first quarter look to be in the 50 range, not as robust as it has. Overall, looking at January, so far same store sales are down 2.2%.

As Mike said, unemployment insurance went up 1/2 of 1%. It's interesting that when unemployment goes up, unemployment insurance to employers goes up as well. You would think it would work the other way, that is unemployment goes up, unemployment rates go down, but it doesn't work that way. Certainly that affects our company, as Mike said, to the tune of about $600,000 in the first quarter.

Comp expenses were higher than normal in the fourth quarter. Unfortunately, I think that we were taking some of the comp income from the captive in the first three quarters and that we will no longer do that. If any analysts are listening to this call, they need to build that into their model that we will not be taking probably $750,000 worth of income probably in the next three quarters and we'll look at fourth quarter on how we feel about comp and in the overall level of reserves when we get there.

All our branches are fully staffed and we're going to be running the company at very tight reigns. We already started that. The good news, the acquisitions don't appear to be in the same kind of malaise that California is. They've gone very well. Utah is doing extremely well for us. Phoenix looks very good and Denver has rolled in very nicely for us. I don't think you have to debate whether or not California's in a recession. It is. And the only question is how bad is it going to get. Most of the markets that we're in now are 6.25% unemployment. Moving higher. If I had to guess that in January the unemployment rate in California probably was closer to 7%.

We're seeing a great deal of weakness among our customers. We remain very positive in signing new customers. But we see -- have no visibility as to an upturn as of today, as we sit here. Which doesn't mean that we're going to give up and kind of abandon ship. It just means that certainly we're fighting an uphill battle on the macroeconomics. So, I guess overall I would say that if we can replicate '07 in '08 in a recession and I don't know where the recession goes from here. I don't know if it gets substantially deeper or it stays about where it's at.

The Fed -- in my opinion the Fed has done some good things in terms of lowering the interest rate and now you've got Congress throwing $170 billion into the economy and we'll see how that plays out in the marketplace. I'm certainly glad that the Fed's responding. The last couple times that I've been going through recessions and the Fed didn't respond and we got so far behind the curve that it took a year or so to get out of it. I think the Fed, doing what they're doing, gives some hope that the corner will turn on the economy and if so, we'll participate.

In general I would look for this year to be kind of break-even with '07. I think that would be a big win for us an we will be continuing to expand our base. Our overall strategy of expanding our geographic presence to lessen our total exposure to California-- we've accomplished that, or at least got a good start on it. I don't know if we've accomplished that but we've got a good start on it. and it shows up in our numbers, that we're not totally dependent on California, just to run our company. California is a big place. It's a wonderful place to do business. But it does get some fairly wide economic swings. And with that, we'll take your questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Josh Vogel.

Hey, good morning, fellas.

Good morning.

Could you just give a little bit more detail on the spike in the workers' comp, the workers' comp costs. Were there just unfortunate spike in accidents last quarter? What happened there?

Josh, it's just kind of an overall looking at the reserve level. In four '07, and development in past years that we felt that it was appropriate to be conservative and make sure that we're well-covered on that front. Unfortunately, had we not been taking some of the captive income, we would not -- earlier in the year, we would not have had a spike. So overall, our comp for the year was I think at 2.9% or 2.99% or whatever. So-a little better than last year. We got it spikey in here and we're going to fix.

You said we should not expect 750 worth of income in the next three quarters.

You need to take your estimates by about that much for the first, second, third quarter. It's already built into our numbers for the first quarter. And then we'll be able to look in fourth quarter, and, If appropriate, we'll take it in income. If not, then you won't see it. So this running -- you get really spikey if you take it all in income and anything doesn't go perfect, we're not going to do that.

Right.

So we're just going to be more conservative.

As far as your safety inspection program, you think that's still running well?

Yeah, I'm very pleased with it. In fact, '07 was maybe the best year in five years we've had on accidents and claims and size of those claims.

Can you tell us how many -- how much you were down in claims, '07 versus '06? Do you have that number?

The overall number was relatively flat but the number of time loss I think was -- about half.

About half. And those are the expensive claims.

You mentioned on the last conference call about if the stock got below 20 you would be aggressive buyers. I'm just wondering your thoughts on the stock buybacks.

I am an aggressive buyer but we're limited to what we can buy. We are in the market and we will continue to be so and we've already been in there and bought some shares and we're happy to take the shares, yes. We're very pleased to buy our stock.

Could you just remind me how much left you have on your current authorization.

Well, from my point of view, I think it's right around 10 million shares.

10 million shares.

Well, we have -- that's my point of view. The board's authorized --

840 remains.

We've got 840 remaining.

Okay.

My point of view is a little different.

Okay. And you think the dividend's safe here? You plan to keep it intact?

Yeah, we're making money. We had a great year and even though our first quarter is down a little bit, but the rest of the year looks to be I think a comparable year to '07 and the dividend's pretty light compared to the kind of cash we throw off here. There's no lack of cash flow in the company. I wouldn't be surprised that-- unless--

The only caveat I'll throw out here, is I don't know how bad this thing gets, this whole recession deal. I don't think anybody does. I watch CNBC in the morning and Chambers from CISCO comes on and he said January weakened. Well, it did, yes, I'll tell you right now, January weakened. There's no question from December.

Right.

So there's a lot of other people that are seeing the same thing and it appears that it's much worse here in the United States than it is for those multi-nationals. And I would guess that if you could separate California, you would probably see them right at the top of the worst in terms of where the states that are sort of leading the whole deal. You have national unemployment 4.9. And, I'm going to guess that California outside, maybe the city of San Francisco or something. The outlying areas-- Kevane Wong of J and P went around and did a survey of all the cities in December and the average was around 6.25% unemployment. So, if it weakened, then probably I'm pretty correct about being about 7%.

Just lastly outside of the captive accounting, you're baking in the weakness you saw in January fully into your guidance.

Yeah.

Yeah. We're not -- we don't have rose colored glasses on here.

Thank you very much.

Thanks.

Your next question is from Tobey Sommer.

Thanks. Bill, just wanted to clarify something in your prepared remarks and then just in the recent questions. You said 2008 kind of break-even compared to 2007. You mean roughly the same level of earnings, you don't mean actually break even from a net income perspective?

Thanks for the clarification.

I won't be here as a CEO if that happens, or unless we go to 12% unemployment. If we can replicate '07, make $1.47 and $1.50 in '08. I think that would be a good year.

Okay, thank you. Then just to get a sense for how you think the workers' comp evaluation will work throughout the year. Do you think that-- since you're not going to be booking that income the first three quarters, that you may address how things are progressing-- kind of on your third quarter conference call, what an expectation may or may not be-- kind of headed into the fourth quarter?

Well, what you run into -- yeah, we could do that. You have to be careful because you're dealing with accountants and you're dealing with actuaries-- so -- and you really don't get into that until you get into January. So, I don't know that I want to get expectations up in the third quarter. I can give you an overall sense just as I said, about how '07 was, I can give you an overall sense of how things have gone.

Right. Right. Could I just -- could you update us on what the percentage of your business is in California and then maybe from a strategic standpoint, where you would like it to be and expect it to be a couple years from now?

Well, on the good years we would like it to be 100%, in the bad years we would like it to be 10%. We're about 70%, 65.

75.

75% in California and having run branches with big customers, I would prefer that to be less than 50%. Now, let's just hope we don't get to 50% the wrong way. I mean, we can grow Utah and Denver and Phoenix, those were three of our target markets and we still have three more markets that we're looking at short-term. And we can build those markets to lessen the dependence on the California market, I would be -- I think that's an overall strategic goal that we're looking at.

Right. And then I'll ask one last question, I'll get back in the queue. When you look at the slowdown that you saw in business in January, have you been able to perceive any change on the part of potential sellers in the marketplace, that may present opportunities for you to take advantage of with your substantial cash balance? Thanks.

You know, actually, I'm not sure that we would have been able to buy either Denver or Phoenix without a perceived issue of a recession coming. I mean, I think in both cases, I heard that they just didn't want to go through one more downturn.

And so I'll be shocked, I'll be surprised, if other opportunities don't open up to us on the same basis. It's better to buy them in front than it is when you get in it because once you get in it they say well, geeze, you know, we might as well just ride it out and then things will be better and we'll sell on the other side. So as long as those markets that we're looking at are still fairly vibrant, but the rest of the country is a lot of talk about recession, I think those provide opportunities for us.

Thank you very much. I'll get back in the queue.

All right.

Your next question is from Tim Brown.

Good morning.

Good morning.

Hello, Tim.

Hi. Just wanted to go back to the workers' compensation really quick. You said 2.9% for the year. And that's what you expect to end 2008.

Yeah, we'll be right around that number, yeah.

Yeah, it was 299 for the full year, 304 for last year so both years are about comparable at 3% of gross revenues.

Right, about 3%. And I'm curious as to your take on the fact that the unemployment rate is rising, the economy is getting worse. Is there a possibility that you see workers' compensation claims rise in that type of environment in 2008?

I haven't really seen any indications of that, Tim, so far. I mean, our '07 year was a good year. What you would see would be the fraud. And I haven't seen that. I haven't seen a lot of it, let's put it that way. There's always a certain amount of claims that are very questionable that nobody witnessed and so on and so forth. But I haven't seen it like it was back in the 2001 period.

Okay. And I guess the way to think about the spike in Q4, really, that should really be more spread evenly throughout the year?

Yeah, that's -- the only mistake, between you guys, the analysts and me, and Mike, wast that we kind of let you guys and us lead down the path of including all of the income and quite frankly, we would have had a $3 million excess sitting at the end of the year so, it would have covered what we needed to do.

Said another way, the spike in 4Q is not -- there's no correlation between a changing economic environment.

Okay. I mean, is there -- within that captive, is there money that will hit the income statement at some point?

Well, it did this year and you know, if you think about it, we probably brought in $800,000 or so. So yeah, there's earnings there. Sure.

Because about $800,000 for the year?

Yeah.

Okay. And then just kind of switching back to the attrition and maybe you could just give us some color on it. You said 22 customers left on their own. Was that something to do with their own financial difficulties with the credit situation? If you could just give us some more color there.

The recession deal, we had three companies go bankrupt in the last week. So I mean, when I say California's in a recession, I'm not kidding. When you go bankrupt, it's not recession, it's depression. So there's a lot of that going on out there. People I think left trying to survive.

I mean, we do charge fees for our services and at some point when it comes down to survival, you don't give a rip about HR. I mean, you could care less. So I think there's that element in there and our job is to just stay ahead of it, sign more customers than we lose. And I haven't really at this size been through the recessions enough to know just how many customers will leave and how many will go out of business. I mean, I don't know that I have those kind of numbers yet.

Do you have a January attrition number?

Well, you know, it tends to be very low. If you go back to October, we only lost like five and then we lost a few more in November but then the big swing came in December. So in January, we've lost a very low number. The real key will come around what happens at the end of March. It tends to all happen around the end of quarters. So I think it's five or six in January. It's not a big deal. But I'm not going to put a lot of faith in that and try and run that out and say for the quarter it will be 15.

Okay. And then just on the staffing side of the business, have you seen demand -- is demand declining at this point or where is the demand?

Well, no, the big decline in staffing is right in Northern California, staffing was down 48%. So-- and they tend to deal with a lot of multi-national companies and so that's -- outside of that, most of our staffing stuff is pretty well set. I mean, it's not really going to be subject to sort of the overall economy, per se unless it really gets bad. Where we have exposure on that bais is going to be Utah and Phoenix and Denver now because those are pure staffing places and so far those markets appear to be very solid.

Okay. Thanks, guys.

Your next question comes from [Kevane Wong].

Hey, guys. Few questions. First the easy one. Tax rate going into '08, what are you guys thinking it might be? Last year it looks like it came out a little over 35. Should we be looking at mid-35s for '08.

35.5, 36.

Okay.

It's an evolving number as assumptions grow and shrink and tighten up and we try to go into the year more conservative so that at the end of the year we're trueing up on a positive note.

Looking at the-- generally with the revenue guidance for '08, is really sort of the swing here between what people are sort of looking for before and what you guys are sort of guiding, is its more on the staffing business because that should have more of a swing or is the PEO business also net balance because maybe getting a lot more new clients but the existing base is coming down so enough to make that a negative number. Trying to get a sense on where the different pieces, staffing versus PEO should be looking to grow.

Well the staffing side because of the acquisitions is going to be up. The PEO side, so far, I mean, -- I'm going to do round Robins next week with the branches in the next two weeks, but what I'm hearing is that even though they're signing a lot of new customers, they're losing headcount at their current customer base faster than they can sign it up. So at some point hopefully that will stop. And when that does, obviously there will be a slingshot effect because we'll have a lot more new customers than we had before. Until that happens, we're kind of on a treadmill.

Is it more flattish or is it actually net net sort of looking down right now?

It's looking down. That's what I said. Over all the company, -- and I get to see all the branches and where they are. If you look at the top of all of the branches that are down, it's almost like all the California branches. They're not down huge but again, it's the 9,000-pound gorilla that whatever they do, it'sgoing--- we're going to reflect in the company and you're the one that ran the unemployment deal at six and a quarter. I think if you did it again we'll get January numbers (inaudible) up, I bet it's up.

Is this causing a pricing pressure or is it simply a matter of the guy that can afford it are the ones that are doing okay and the ones that aren't are the ones that are leaving anyway so your pricing's holding up.

Our pricing's fine. Our margins in terms of that. We haven't seen that kind of pressure. It comes down to, we just can't do it anymore.

Got you. And then one --

nervous.

Went in and said I'll give it to you free, they say I can't do it anymore.

Got you. Then last thing, maybe this gets a little complex, maybe I'll take most of it offline. But looking at sort of the workers' comp swing in the quarter. First on the balance sheet is that what caused the movement of roughly $3 million from the safety incentives, liability line down to the workers' comp claim liability line, is it simply a moving of the fees there, at thats what-- then sort of flows through on the P&L hasn't impacted well.

The interplay between accrued workers' comp liabilities and safety incentive liabilities, we look at it from an operational standpoint as holistic. It's very interactive. And on a quarterly basis we sort of recast what the interplay looks like it's going to be in future periods. And as a consequence of that, those numbers when you stratify it periodically do have swings in them. I think from your perspective, you should look at it on a combined basis and going forward, we will probably report it on a combined basis.

It's so interactive, Kevane, that -- because you've got contracts expiring every single month, it's really a hard number to nail down. I mean, you can kind of pick a time. We can tell you what that number is, but there can be some fairly volatile swings in it over time, depending on what the reserves do and they have -- once the reserves go up, the safety incentive goes down, so you're moving back and forth.

So maybe taken a different way, should we read into that any sort of issues of having the safety incentives liability going down from 3Q to 4Q or is that really more simply a accounting related to the captive that you sort of adjusted?

It's just -- it's more related to how much we paid out and the reserves went up and the safety incentives went down. Again, they're very interactive. So when you see our reserves jump, you're going to see our safety incentives go down.

Got you. But it's not an -- well, I guess what I'm getting into. Is it indicating at all that there's any judgment on your guys that your risk there is higher simply because of safety incentives, liability line is lower?

No.

No.

Okay. Thanks.

Your next question comes from Ruthann Roussel.

Hi. It' Ruthann Roussel, speaking, good morning.

Good morning.

Most of my questions have actually been answered already. There was one that I wanted to go back to quickly, which was-- we've talked in the past on calls about the possibility during the recession itself if there were to be one or a downturn of not necessarily acquiring competitors outright but simply waiting until they're in trouble or no longer existing and then grabbing their market share. Is that something that is still in the picture and how does that dove tail with your statements earlier on the call today about opportunities opening up for acquisition as you move into the recession?

Well, we already benefited some from people who are going out of business and it's mostly related to California. And I think the opportunities to make acquisitions in other states in metropolitan areas, until those get into the recession are probably going to be more opportunistic for us. We've made a couple very fast here. We're still not done with Phoenix. I mean, they've only been on board since the fourth. But it looks very promising that it will go as smooth as Denver did and then we'll have our sights set on some other markets.

Thanks very much.

Your next question is from Sean Willard.

Good morning.

Good morning.

I think mine have been pretty much answered but just a couple quick follow-ups. You've got 5.5, 6 bucks a share in cash. This is sort of (inaudible) on what everybody else has said. Doesn't that make you a first tier buyer when people start shopping? You get to see the premium goods up front. You're not chasing anything out there, right?

Yeah, I mean, you know, cash talks and most of the acquisitions that we run into have got some other buyers but they want to do an earn-out over five years or that kind of stuff and so we just walk in and we typically pay them 75% up front and do a little bit of a hold back for performance and move on and in a year they're out of it.

And with -- I didn't run the number. I think I heard 11 day DSOs. You mentioned you had a couple people who just went out of business at the end of the year. You don't have any material credit risk though that's out there. You've got either reserves -- not reserves, but either prepayments they've made or very, very short leash on people, so not really any reason even with the slowdown to expect anything to pop up there that might be of an impact going forward?

Well, the good news is that nobody has that kind of size that would really be an issue to us and we do have them either on prepayment or personal guarantees. The personal guarantee is probably more powerful than anything that we do. I would say our exposure to bad debts is very limited. Very limited.

Okay. And then lastly, since you have started to pick up something in Phoenix, which you talked about for, gosh, I don't know, two years, that you would like to have been there. Granted it's small in scope compared to the rest of the company, but any thoughts of starting to head more east now that you have something established in Colorado and Arizona or really those are still huge markets for you and you'd prefer to just leverage what you have there?

Well, I think overall our strategy will be opportunistic. But certainly Phoenix, Utah and Denver, Salt Lake City, provide a lot of opportunity for us to build some very substantial branches and to be real frank about it, Sean, that's a lot on our plate to get those up and moving in our direction. So while we bought a nice toe hold, I would -- Utah is a little more than a toe hold, but certainly Denver and Phoenix are toe holds in markets that we want to be in and our strategy on a go forward basis will be how do we expand our presence in those markets and really take advantage of the size of those markets.

Thanks.

Next question is from Walter [Pyster] .

Good morning, Bill.

Good morning.

I wanted to ask you, is most of the recession in California coming from the real estate slowdown or is it in all segments of the California economy? In other words, what type of businesses are failing?

The ones that fail, Wally, are a lot of the construction related. Those are the ones that go bankrupt. But overall, all the customers. I mean, it's a typical recession. You look around and the restaurants aren't doing as good and importers aren't doing as good and the retailers aren't doing as good and it's pretty much across the board.

Across the board. Okay. Just one other, Bill. The board's authorization was to buy back 10 million shares; Right?

No, it's a million. My authorization in my mind is 10 million.

Oh. 1 million shares. Okay. So 840,000 are left to be able to be bought back?

Yeah.

That's correct.

And when does that expire?

It doesn't.

It doesn't.

Doesn't expire. Okay. Thank you.

Yes.

Next question is from Jim [Bisaunt]

Good morning.

Good morning.

In the past you the sector that posed the most exposure for you was the tech sector. Is it still the tech sector or has it changed given the recent change in the customer mix.

We have very little exposure other than in probably our Northern California market to the tech industry.

So overall what sector would you say is your biggest area of exposure, company-wide?

Probably distribution, I would think. Warehouse distribution. We do a lot of that. On the staffing side of the world. On the PEO side, we're very diverse. There is very little exposure vertically any place. It's pretty much across the board.

Okay. Thank you.

At this time, there are no further questions.

Well, all right. Let's just -- we're hopeful what the Fed's done, has started, provides some daylight at the end of the tunnel and it's not a train coming at us. I don't have a good view of which way it's going to go.

But certainly, again, I think the Fed has done the right things to sort of buffer the economy and we'll participate and do extremely well if we can get the economy back sort of on track. We will talk to you next quarter. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.