Barrett Business Services Inc (BBSI) 2008 Q1 法說會逐字稿

Good afternoon. My name is [T.K.] and I will be the conference operator today. At this time, I would like to welcome everyone to the BBSI first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). Thank you. Mr. Mulholland, you may begin your conference, 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 first quarter ended March 31, and our outlook for the second 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 the actual results to differ.

Most of our comments today will be based upon gross revenues and various relationships to gross revenues because management believes such information is, one, more informative as to the level of our business activity; two, more useful managing our operations; and thirdly, we believe it adds more transparency to the trends within our business.

Comments related to gross revenues, as compared to a net revenue basis of reporting, have no effect on gross margin dollars, SG&A expenses, or net income.

Turning now to the first quarter results. As reported, the company earned $0.01 per diluted share in the first quarter as compared to $0.15 for the same quarter a year ago. On a summary level, the decline in earnings was principally attributable to three factors: One, a modest increase in gross revenues of just 0.8 of 1%; two, a 46 basis point decline in the gross margin percent; and, three, higher branch level SG&A expenses due to three acquisitions since 2Q of '07.

Total gross revenues for the first quarter of $259.6 million increased less than 1% over 1Q '07. Excluding the benefit from the three acquisitions, organic growth for the company on a quarter over quarter basis was a decline of 3.5% which reflects overall economic conditions in our markets. California, which comprises approximately 75% of our overall gross revenues, was flat for 1Q '08, down just 0.3 of 1%, owing principally to a decline in staffing as PEO revenues in the state increased 1% over a year ago.

Staffing revenues for 1Q '08 increased 27.9% over 1Q '07. On an organic basis or comparable branch office basis, staffing revenues declined 11.5% in the quarter. PEO gross revenues declined 2.5% on a quarter-over-quarter basis. Acquisitions did not affect the comparability of this rate.

Regionally, the Portland and Mid-Atlantic regions demonstrated very strong double-digit growth rates for PEO business. In view of the economic climate, we attribute this growth to fundamental market share gains.

Our gross margin percent on a gross revenue basis for 1Q '08 declined 46 basis points from a year ago. Direct payroll costs decreased by approximately 20 basis points due to increased staffing business, which has a higher mark-up percent, thus, lower payroll percent. Payroll taxes and benefits for 1Q '08, expressed as a percent of total direct payroll, increased over the same quarter last year primarily due to a 50 basis point increase in our California unemployment tax or SUTA rate. This increase contributed approximately $600,000 of incremental SUTA tax as compared to 1Q of '07 or a decrement of approximately $0.034 per share.

As you may know, for accounting purposes we do not utilize a constant annualized estimate throughout the year for our payroll tax burden. We recognize the actual effective payroll tax rate as incurred each quarter, which is one of the contributing factors as to why our earnings typically stair-step up through a calendar year. This method will create the heaviest payroll tax burden in the first calendar quarter of each year.

Workers compensation expense for 1Q '08 increased over 1Q '07, both in terms of actual dollars and as a percent of gross revenues. This increase was primarily attributable to higher estimates for claim costs.

1Q '08 SG&A expenses of $8.7 million rose $1.3 million or 17% over 1Q '07. It is important to note that 100% of this increase was due to the non-comparable branch offices from the three acquisitions we completed between July of last year and February of this year. On a comparable office basis, SG&A expenses for 1Q '08 declined by 2% as compared to 1Q '07.

Turning now to the balance sheet, at March 31, cash and marketable securities of $56.8 million at quarter end declined from December 31 due to an initial payment of $3.8 million in connection with the acquisition of First Employment Services in February; the final deferred payment to Phillips Temps, a December 2007 acquisition; and the payment of our 2008 excess workers compensation premium in the month of January. The balance of the change in our cash position from year end is simply attributable to fluctuations in working capital requirement.

Trade accounts receivable at quarter end of $41.2 million were up over the 12/31 balance due to an increase in day sales outstanding in accounts receivable, or DSO, from 12 to 14 days coupled with the small increase in the amount of accrued receivables at quarter end. In view of the economic environment, we are monitoring collections and credit terms very closely. The increase in good will on our balance sheet simply reflects the acquisition of First Employment Services in February.

Turning now to our outlook for the second quarter of 2008, as recently reported, we are expecting gross revenues to range from $262 million to $267 million for the current quarter. This projection represents a very modest sequential increase over 1Q '08 and a likely small decline of approximately 1 to 2% from 2Q of '07. As we noted in our last conference call, and Bill will reiterate again in a few minutes, we have very little visibility in the directional trends of our revenue stream. There are numerous cross currents in our customer base which are mitigating, to some extent, market share gain.

Based upon the foregoing estimates for revenues, we anticipate diluted earnings per share for 2000 -- for the second quarter of 2008 to range from $0.24 to $0.28 as compared to $0.42 per share earned in 2Q of '07. The current economic climate warrants a very cautious outlook as we continue into 2008.

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

Thanks, Mike. In the quarter, we signed 87 new PEO customers, which is very strong again, and during that quarter, we lost 41.

I want to read an excerpt. I'll give you the breakdown of the 41 that we lost. We canceled [per AR issue] seven. We canceled another two for risk issues. 13 were sold, closed or no more employees, and 24 -- actually it is less than that -- left on their own. And I'll read you a little excerpt from an e-mail we got from one of our customers that I think kind of sets the stage for why customers would leave to take it back in-house.

I quote, "Hi, Beverly. I know you're aware we've been shopping our workmens' comp with our broker. We decided to move our payroll back in-house. I want to emphasize I made the decision for the reasons of flexibility, i.e., float time, with our workmens' comp schedule and not on BBSI's performance. We've been very satisfied with the work that BBSI has done for us.

"At this time, I'm forecasting a busy schedule in the near future from our general contractors and will be invaluable to future growth. I feel our ability to defer many bills as possible to offset the lag time of our receivables from our general contractors will be invaluable for future growth. I know discussing this with you before making the decision would have been a better course of view, but knowing that BBSI would not be able to allow us the same float time as a typical carrier made any other reasons for staying irrelevant.

"We appreciate all of the work your company has done for us and regret to make this change. But at this time, we feel this is a decision we had to make."

So, I mean, that's kind of the underlying theme of when companies decide to leave. They have to pay us all of their taxes and workmens' comp virtually on the end of the week, on Friday, we trade checks. And so those who want to use IRS money and state withholding money and workmens' comp premiums and medical premiums to help finance their business, we're not going to participate with them in that.

March was not a particularly very good month. I think you've seen that in other companies. It has not deteriorated. That is the good news into April from March. It has remained relatively steady. It has not picked up. Our forecast is based on a continuing run rate of what we've seen in the first three weeks of April.

So I guess I would tell you that if the economy continues to weaken and gets worse, then we'll be below our estimates. If the economy gets a little stronger or at least stays stable, we'll probably be a little bit above the estimates. Our visibility is not very good in terms of which way the overall economy goes. I remain relatively hopeful that the economic stimulus, the low interest rates, loosening up of the credit markets will all have an impact on our Company at some point.

We continue to sign at a very fast clip a new business. That's a very positive sign for our Company. But if you were to examine our customer base, not only do we have a higher churn of our customer base, but the customers who are staying are much smaller than they were, some of them 50% and 60%. The headwinds that we face have to do with the macros of the economy. The bad news is that when the economy gets weak, the unemployment rates go up. The workmen's comp gets a little more challenging. And so those are the things we're facing.

However, I'm really very, very comfortable with the Company in terms of the branches, our staff level, our execution level. And there's really not much changes we can make except to nibble at the edges, having to do expenses and run a very tight ship. We will do that.

With that, I'll open it up to questions.

(OPERATOR INSTRUCTIONS) Your first question from Josh Vogel.

Hey, good morning.

Good morning.

First question is on buyback activity. I was wondering how many shares you bought back last quarter?

1Q is a little over 97,000.

Okay. How much is left on the current authorization?

Over 700,000 shares.

Okay. Is this going to be a more aggressive strategy of yours, given the current stock price that you would want to step up the buyback activity?

Well, if you guys -- if we would take it down to 6 or 7, I think I could be pretty aggressive, yes.

Okay. What about the dividend policy? You think you're going to keep that in place?

Oh, we're going to slash the dividend. Things are so goddamned bad around here, we just take it, maybe go negative. Try to raise capital. We'll be like a bank, how about that?

Okay. All right. Well, let's shift the gears.

That's a no.

What's that?

That was a no.

I know, I got that, thank you. The staffing business, I was wondering if you could maybe give us some macro and Company-specific trends you're seeing across the light industrial and construction markets?

Non-existent in the construction market. At our legacy staffing, which is mostly California, has done exactly what we thought it would do. That is, goes to zero. But our Utah and Denver and Phoenix markets have remained very strong. Those look to be pockets of relative strength in the United -- as far as markets go.

Yes.

The big 800 pound gorilla is what's going on in California. The rest of the markets appear to be so far appear to be very, very mild. I mean, they've been somewhat affected but nothing close to California. The California unemployment rate is probably 7.5%, in a lot of the markets we're in.

Can you remind me what percent of your staffing business is in California?

Mike.

It is approximately 23%. But I guess I would just add the caveat is that our overall, to reiterate a point I made in my prepared remarks, that overall revenues in the state of California on a quarter-over-quarter basis were flat compared to a year ago.

Okay. Then, for your guidance for Q2, are you pretty much assuming flat Q1 versus Q2?

Yes.

In California?

Yes. Yes. Flat revenues, period.

Okay. Now on the acquisition front. Do you plan to pursue -- continue to pursue acquisitions? Which markets? Which business lines do you think that would be the course of action?

Well, the Nevada markets, specifically, Las Vegas and Reno, New Mexico, Albuquerque -- those would be three markets we'd love to be in as well as the Phoenix and the Denver weren't very big acquisitions. If something came along that would tie those to a bigger market, we'd be happy to do that.

So, I -- we'll continue to look at acquisitions. I think we're deep enough now into a recession that there's not many sellers out there. They tend not to want to sell on the down side. They want to sell on the upside or at the top or when things are looking better. It is hard, unless you want to pick up just absolutely horrendous business, and I am not interested in doing that. A lot of the acquisitions are pretty tainted.

Yes. Okay. Just lastly of the 20-something, about 20 clients that left on their own volition, I think you had 22 that left last quarter under the same terms. Are they most -- the ones from last quarter, were they mostly bringing it in-house or were they going to a competitor? I meant from Q4 versus Q1.

I just have not heard of anybody going to a competitor, Josh. I think I would hear that. It is -- we're not undercut on price and I'd be surprised if the competitors in California are doing any better than we are.

Okay. Thank you.

Yes.

Your next question comes from the line of Tobey Sommer.

Thank you. Just want to follow up on one question to start off. On the buyback activity you said about 100,000 shares in the quarter. Then at these levels, let's say before we get to $6 or $7 a share, would you anticipate a little bit more activity in that regard?

Well, remember we're limited by what we can do. We're active in the market. We're limited to 25% of the average daily volume. We can't be in in the first trade of the day and we can't be in the last half hour.

Right.

They've got 8,000 rules on what we can and can't do, but we're in there. So if it comes our way, we'll take it.

I was just curious. Have you evaluated the possibility of a -- of a preplanned repurchase program that would enable you to buy during black-out periods?

That's already in place.

Okay. And then the -- do you have the number of actual PEO customers in the quarter? Couple of details like that. I was wondering just why you're looking for that, if you do have it, Bill, what kind of average-sized customer do you think you're serving now versus a year ago or two years ago?

I would say the average size is 15% less in terms of numbers. Partly not because that is a choice, that's because of the economy. So all things being equal would they be the same size as they've always been in that 30, 35 range, but given the level of the economy now, you're probably talking about 20 to 25.

Okay.

You got to -- you got to sign more of them. When you start looking and saying, "Well, how much did those customers do in '07 that left versus how many did you sign in '08?" They did more business in '07 because they were bigger.

Right. Okay. And, then, looking at the branches, specifically, are there some branches that slid into negative territory in terms of losses or any tweaks that you plan to do, either in terms of the number of branches or in your compensation structure at the branch level?

Nothing -- I mean, one of the things you saw was the SG&A decline. That's primarily due to bonus structure. There's a big flexibility component having to do with wages, given our bonus structure. That will be obviously cut just on the lack of profitability at the branches.

We don't have any plans to close any branches. There are some, particularly in the first quarter is a bad time to look at branches in terms of profitability. You have got to almost have them on a year-over-year basis, a full year to really kind of look back and make your decisions based on that.

But, in general, I'm relatively happy with the level of management at the branch level. And as long as you don't start bleeding red ink, the branches, you're positioning yourself for the recovery on the other side whether that is this year or next year. When you get into these kind of recessions, what you have to do, at least my experience, is you just position yourself well. You end up taking market share and then you participate rather handsomely on the other side. That's exactly what we're doing.

Okay. And, then, I wanted to ask a question about your methodology for forecasting. Typically speaking, you've looked at the available weeks at the beginning of the quarter before you report earnings and then forecast it from there. Given the way the economy has faltered somewhat and continues to do so, do you think you might reevaluate that methodology and maybe take a look at your first bunch of weeks in a quarter and then give that a somewhat discount the future weeks?

We did that. Part of that, if we take the first three weeks of April, which is what we did, normally there's a pretty big pick-up in May and June, we --

Seasonal pickup.

Seasonal pickup. And that's what happened to us in the first quarter. We got nothing out of March. Normally you would have a really big March and a kind of kick-off to the second quarter. And so we're doing that. We just said it's not going to get better than it did in the first three weeks of April.

Okay. So, you think you've effectively done that then?

Yes.

Okay.

So, and the caveat will be that if the economy slides, gets a lot worse in May and June. I mean that's something I don't know. I mean, I don't see it as I sit here today. But that's what we're going to be subject to.

Okay. And, I wanted to ask another question about your new customers and I'll get back in the queue. Thank you for being generous.

Sure.

Is there any discernible pattern, geography, kind of customer that are turning your direction at this stage in a softening economy that strikes you as interesting?

No, not really. There are more branches participating that are not necessarily in California. But I wouldn't -- I wouldn't say that there's any particular vertical that is kind of coming our way. And again, remember that we're really looking for good companies, not necessarily trying to penetrate verticals in the market. So, it is a pretty widespread diverse base that we attract on the PEO front. Obviously a lot of the canceled customers or the customers that leave, some of those are in the construction business and are related to that. We still have a fairly wide base of construction-related. It is not necessarily construction in and of itself.

But housing, housing is -- is not getting any better. I'll just -- that's just my take on the whole thing. It is not -- we have not seen any upticks in the housing market.

Thank you very much.

Yes.

Your next question comes from the line of Ruthanne Roussel.

Good morning. It is Ruthanne Roussel speaking.

Yes.

Most of my questions have already been addressed. I did want to ask one more about if we can beat the horse here of the first quarter seasonal pick-up that did not come. Is that also adjusting for the fact that Easter came in March this year rather than in April as last year?

I don't think we have much related to Easter that I'm aware of. I think it's, some of it is weather-related, I know that. It's just activity-related. You get into the spring, start getting into the spring and a lot of our canneries start to pick up and sometimes early. This year not so much because it has been a really wet year, particularly up here in the Northwest. I mean, we're -- most of the people in the -- well, not most but a lot of the people are starting to build arks up here.

Well, I know I am.

Yes.

And also, if you've already mentioned this, then I apologize for making you repeat yourself But I've got a note about the percentage of staffing revenues that are rising from California. What percentage of PEO revenues arise from California?

Approximately 85%. That's on a gross revenue basis.

All right. Thanks. I'll hop back in the queue.

All right.

Your next question comes from the line of [Walter Pyster].

Good morning, Bill.

Good morning.

Have you set a date for the annual meeting?

We have. May 14.

May 14, okay. All right. And is that going to be in the [Back Club] or where?

It's going to be over here at the same hotel as we held it last year in Vancouver.

Okay.

Proxy statements were mailed on Monday, April 14.

Okay. I've been traveling so I just hadn't seen the material. Thank you.

Yes.

Your next question from the line of Mitch Almy.

Good morning.

Good morning.

A couple quarters back, there was some mention of taking a company private and we're just looking at the share price here. And I think at that time the shares were just a little bit below $20 a share. And, subsequent to that traded in a pretty narrow range. With this slide that's occurred in the last couple of days, particularly today, can you give us any sort of update on your thoughts that way? I mean, not asking for non-public information, but just some thoughts on the valuation and outlook for the shareholders?

Well, I'm very comfortable with the Company. So I'm perfectly willing to have the Company buy as many shares, particularly down here, as it can garner over the next months in front of us. And, because I know what's on the other side of this. I mean, either, one, you got an Armageddon for the United States economy or, two, we're going to improve. And if things level out and the economy improves, we're going to do really well. So, if -- I'm -- I'm more than patient. I've been doing this a long time. I've been through four or five recessions and they're all the same.

They look bleak and revenues go down and sometimes they're worse than others and profits are less than, but if you run a tight ship and you survive and you take market share, you come out the other side and everybody thinks you're brilliant. Well, it is not brilliance, it's just what it is.

We're in a business that is subject to the economy. Given the opportunity for me to own all of the Company, I would be very comfortable with that.

And, my last question. With all appreciation of your statement on the lack of visibility, it seems that this quarter was comfortably below the guidance and the expectations of those analysts that I listened to. And so stemming particularly from the workmen's comp business, I just didn't know if there was anything extraordinary in the quarter or if there was some deterioration above and beyond what you thought was going to be temporary? Because it is a pretty healthy rebound to the following quarter with business sort of basing at the level it was at in March.

What happens when we go into recessions is unemployment goes up and workmen's comp goes up. I mean, it's counterintuitive to what you would think but that's exactly what happens. And we did experience a little uptick in the cost of our claims during the quarter. Nothing that I'm very alarmed about and nothing I can do about the unemployment rate. I mean, that's just something that we're subject to.

And part of -- part of weeding out of customers will be those people who cause us some pain, particularly on the workmen's comp front. Some of it is related to immigration, in which we've really tightened down on our customers about hiring illegals and there have been some retaliatory claims from illegals filing claims once they've been asked to produce a valid Social Security number. But from my perspective, I don't know exactly what the government is going to do. There's enough scare tactics out there to make you take notice. And I don't really relish going to jail over hiring illegals. So.

Sure.

So there's some of that that's going on.

Thank you very much.

Yes.

Your next question comes from the line of Bruce Ackerman.

Good morning, gentlemen. I just wanted to ask you about the big acquisition in Utah, if that was still meeting your expectations?

Well, thank God or we'd be upside down on the earnings per share. Our acquisitions are actually very positive for us. I think we're probably a little ahead of schedule on Salt Lake.

We're very pleased with their performance thus far. As we said in February, that all of the transition issues are well behind us. And, again, we're very pleased with the new markets for us.

Yes. We really started to work on PEO in the Salt Lake market. I spent a little time with them, and Mike has, and I think that will bear some fruit in the future here.

Okay. Very good. Thanks. That's all I had to ask.

All right.

Your next question comes from the line of [Jim Missoni].

Good morning, folks. Just a question if you could help me tie together the margins. I know you guys were saying your gross margin was down 40 basis points or so. You're using the non-GAAP piece. On a GAAP basis, it has dropped a little bit more. Looking at the staffing statistics that I see reported by some of the industry watch groups, where staffing has been essentially flat for this quarter, where's the give here and the gross margin that I see in a decline? Is it pricing or what is causing this?

I think it is two issues. It's unemployment and comp. That's kind of the end of that story.

Okay. Could you just tie together the difference between the two? The -- maybe that's an offline question then for Mike. But the non-GAAP versus the GAAP here?

Well, margin on a net revenue or a GAAP basis declined from 16% to just under 13%. The biggest pick-up or increases in the elements of cost of revenues were rough payroll costs as well as workers' comp. Direct payroll costs on a GAAP basis increased about 500 basis points or 5% over a year ago. And workers' comp was up a little over 50 basis points from 9/7 to 10/3 expressed as a percentage of net revenues.

I would probably think it might be more appropriate to handle the details of that analysis offline. There is a lot of interplay in between the relationships as you net PEO revenues out of there. But, certain other items remain on the GAAP P&L. So I would be glad to take your call later this morning.

Okay. Thanks, Mike. Another question. These customers that we see that have left and they have taken the responsibility back in-house, historically now, going forward when times turn and things get better, do these customers come back in or are they generally gone? Is there a point of inflection where they come back to you folks and take the service on again?

I think they'll -- we've seen, well, and it's been a long time since we've gone through a recession, 2000, 2001. My inclination will be that when things improve that we'll have a pretty good shot at coming back. Just like the e-mail I read you, I mean I think that customer when they are doing a little better will come back. I think what you have to think about in terms of small customers, this is survival stuff for them. Our margin may be $1,000 a year per person or $750, but that's still money that effectively they look at being able to save or do for themselves as well as manage cash flow better. That's, when the economy slows like that, I see it over and over again. They don't get paid, somebody slows down them, and then they've got to not pay somebody. I mean, that's just kind of the way works.

It gets into a working capital management priority for them and we would be one of the vendors who they can't stretch. So they've got to fine manage their payables in a method in which they can get vendor-provided free financing, if you will.

And it's the classic way that small business goes broke because if anything gets out of line when they're doing that, they're upside down. They're done. They'll close their doors. So they're walking right on an edge and they know it.

Okay. Great. Thank you.

We have a follow-up question from Tobey Sommer.

Thank you. Wanted to ask you a question about the departures, PEO departures you gave us some detail on. Were they predominantly in California or were they dispersed among your branches, kind of like the sales were?

I am just looking at the list here and I would say 90% were California.

Okay.

Yes.

Then I guess not to belabor the point, but on the workers' comp side, was it a function of increased number of claims or more on the severity side? How would you parse that in general terms?

I would say more on the number. A lot of them are just medical onlys but, nonetheless, yes. I'd say it's more and it's being fairly conservative. Claims are going to get a little more difficult, I think.

Right. And, then my last question is, could you give us an update on the captive and how that's going? Thanks.

Captive, there are no claims on the captive. We were able to set aside during the quarter what we would have normally brought into income. And so, no, the captive is doing what it is doing. And no news is good news on that front. No big claims.

Right. And if we made the assumption that no big claims, thenm in the fourth quarter what would hit the PNL?

Well, the potential exists as much as $3 million, although we would have to see when we get there what that, why, if and why we would want to do that. I don't view that, that we'd get a lot of credit, that would be kind of like what I'm seeing my competitors do. They would bring a whole bunch of money back into income. Nobody cares.

Right.

So.

Okay.

And -- .

Thank you very much.

Then you set it up, Tobey, you set it up for a comparable for the following year. We'll see when we get there. I mean we got to get through the rest of the year first.

Good enough, thank you.

Your next question comes from the line of [Tim Kahne].

Hi, guys. Just a quick question. You mentioned, Bill, that you've been through a number of these downturns. I just was wondering what kind of specific things have you guys implemented or you think is different now in terms of your business makeup? I'm talking about maybe business mix, the way that you guys choose and call your clients, maybe your balance sheet. Other things that may be different now that hopefully you'll weather the storm better versus last time?

Well, the big one is $54 million in cash.

That certainly helps.

It does. I mean, to have a bank breathing down our neck about monthly statements and covenants, very distracting. So, I think so far I'm going to give us a very high grade in a very difficult environment. I'm very pleased with the way the Company is operating in a very difficult environment as compared to in the past, we were substantially more involved in the staffing world. And California staffing is doing exactly what it has always done when you are going into recession, it just goes away.

So, I'm actually very optimistic that if we get through this slightly upper flat, I'll be bringing home some Dom Perignon. I've been through them, and very seldom you get out of this thing unscathed. Right now I'm looking at it, if it doesn't get a lot worse from here, we're going to do really well. I'm very pleased.

I guess then you're saying basically the PEO business is a little bit less cyclical?

Well, and it's easier to get customers. What happens in the staffing world is your customers cut, cut, cut, cut. Nobody wants -- you can't get a new customer. It's a one-way street. In the PEO world you can -- there's hundreds and thousands of little smaller companies out there. If you have a good marketing structure, you can continue to replace what you lose.

I mean, it would be as though I said, "Well, during the quarter we got no new customers and we lost 41." Well, that -- if this were all staffing that's what you would be hearing from me.

Right, right. I guess kind of a little bit more to the same point. What is your captive workers workmens' comp business do, relative to your last downturns, do you think? It sounds like obviously in a difficult environment where higher unemployment is kind of the norm that you'll have more claims. Does that translate to higher losses and more sensitivity to the downturn? How does that work in terms of that versus pricing, etc.?

I think in a downtown two things are going to happen. One, your unemployment rate is going to go up and your workmens' comp is also going to increase some. And what you want to avoid, if you can, is the very large claims. So far we've done a wonderful job of that in the last couple of years.

So things do happen out there, but it's going to take a pretty big claim to get to the captive. And that's kind of a little bit of a throw of the dice but we have not seen that. You tend to get more of the fraud, and more people know if they're about to get laid off that they've got to survive somehow so they file a claim and then you end up spending more money on attorneys and investigators to prove that it is not legitimate any longer. So that's really kind of where your costs come from.

I guess I would add to that is since the last major downturn, the risk profile of our customer base, the quality of our customers, our underwriting standards have improved markedly over the last several years. So that should help mitigate some of the socioeconomic dynamic that Bill is referring to.

The big danger here is if you try to run for revenue, if you feel like that you need to increase your business and you let your standards down, you're sowing the sides for a very bad weed to grow in your garden. So as long as I'm sitting here, I'm not going to back off on the underwriting side of the world.

Thanks, guys.

Yes.

(OPERATOR INSTRUCTIONS) Your next question from the line of [Sean Willard].

Good morning.

Good morning.

Good morning, Sean.

Everything has been covered pretty well. A couple of real quick questions. The SG&A level for the quarter, you mentioned that it was down in the existing business and the net incremental change to that was largely due to the acquisitions. Is that currently at the level that you think it is going to run at though? You had a couple of these that are fairly new. I know you like to centralize all of the processing as much as you can and try to make sure you are not adding any excess staff. Is that completed or is there still room there to bring that in a little bit? Granted, it is not going to be a huge number, but just curious if that's done or if there is still more to be had?

Well, I -- I don't think there's a major, Sean. I think it is what I said earlier, we'll nibble at the edges where we think branches are over staffed or there isn't enough in the pipeline to justify the number of people they have. We continue to look at that almost weekly with branches. But there's really not a major initiative that we can go in and carve anything out. I mean, I think we're fairly tight in terms of our size without really hurting ourselves. And you have to kind of walk a fine line between cutting too much and then you lose more customers as a result of it.

Okay. And then you mentioned the weather and the fact that we've had more rain than normal and we've been very unseasonably cold so far this spring. I mean having snow and [seaside] at the end of April is amazing. Do you think that could have artificially made your comparisons and pushed business out? Because last year we had a warm spring and things actually seemed to start a little earlier than normal.

I hope so. I can't believe the amount of cold weather we've had in the Northwest has been positive for us. I mean, people work outside. And just the level of business activity and morale of people up here in the Northwest is just awful. So, I -- I don't know that I can put my finger on it, but intuitively you would say probably it has had an effect on you.

So maybe pushed out your normal start-up cycle for agriculture and landscaping and all of that kind of stuff, maybe six or eight weeks, something like that?

Well, I don't know about that. It ain't done yet. We just had snow this last weekend.

Right.

Maybe it is the Fourth of July when we get the last snow storm up here. I don't know. I think - well, certainly from an agriculture point of view, if you can't get in the fields, you can't plant, you can't harvest. I know that's going on.

Okay. Then, the last question is, you said you have been through a number of recessions and I'm curious on this go around, when you get to the other side of the recession, whenever that happens, what does your business look like from a mix? I mean it would seem that staffing would be the part that would pick up first and quickest, and what kind of impact would you think that would have on your margins or am I wrong and it would be PEO?

It depends on how it comes about, Sean. The last time, out of the 2000-2001, it was the PEO that just was on fire because customers were looking for help in attracting people and they were growing fast and they really needed a lot of HR support. Staffing tended to come later. In fact, I can make the case, and I think those who follow the staffing industry would say, that really staffing never really recovered from 2000-2001 because it was so heavily tech-based.

Given the customers that I know that are down on the staffing side of the world, we have so few of them that I don't know that I would attribute, I don't know that I'm going to keep my eye on that as much. I mean, Salt Lake and Denver and Phoenix, which are all three into staffing, really have not declined. They haven't declined from the run rates. So would they get a lot better if the economy started to improve? Well, those three markets seem to be doing pretty well. Would our Northwest market and our California markets get better? I would assume so. But I don't know that I'm going to sit around and wait for the staffing side of the world in California to get better. I think we continue to take advantage of what's in front of us, which is the PEO world and build our base and take market share. What will happen on the other side of this is everybody, all of our customers, will add one or two employees. So, when you do that, it will just be kind of boom.

Okay. Thank you.

Yes.

Your next question from the line of Tobey Sommer.

My question has been answered, thank you.

Okay.

There are no further questions at this time. Sir, do you have any closing remarks?

No. I just -- I tell people that hang in there the economy is not very good. I don't think it's going to last forever. I don't think this is the end of the U.S. economy. And we will do really well on the other side of this. And it is just a matter when it turns and we're really (inaudible) one company. I'm very pleased with the level of management talent we have in the Company and I'm really pleased with the execution. So hopefully we have better news next quarter. Thank you.

Thank you.

This concludes today's conference call. You may now disconnect. Again, this concludes today's conference call. You may now disconnect.